Access to credit: How tech changed the credit underwriting process

About seven years ago, my old car began stalling on the street and I suddenly realised that it was time to replace my car. I went to the nearest car dealer, test drove a brand-new car, rushed to the financier’s desk and returned with a list of documents that I needed to furnish to get myself my new “vaahan”. By the time I got multiple copies of my KYC documents together, found private time at the office printer to get my last 6-month salary slips and my last 6-month bank statement, I felt like I had conquered Mt. Everest.

Once I returned to the finance desk at the car dealership with a big grin on my face and a fat wad of paper in my hands, I realised I didn’t have three other copies of five documents that the bank needed. By the time I got this done, coordinated with the residence verifier, answered all the verification questions from the bank and waited patiently for seven days for the loan sanction, I was exhausted.

Cut to two years ago when I had just changed my job and I was upgrading my car, I looked up multiple options on a comparison website, ordered a few test drives and made my buying decision. My bank’s internet banking allowed me to apply online for a car loan. While I sat at the dealership, I pushed a few buttons, entered a few details about my purchase, chose my loan amount and tenure and lo and behold, my loan was approved. My KYC documents were already available with the bank else they had a video KYC process for non-account holders. I couldn’t believe how much the technology, the process and most importantly the customer delight had progressed in the last few years.

Lending to individuals or businesses is a convoluted intermingling of credit risk decisions, operational processes, regulatory adherence to KYC norms, fraud checks etc. which results in the final decision on approval or decline and the loan amount.

Credit assessment of an applicant is the determination of who has the income/means to pay back the loan over the loan tenure and that the amount is within the applicant’s income. In secured loans, the quality of the underlying security (property, car, shares etc) is also assessed since the loan is given against it. A credit assessor’s quest is to determine the source and stability of your income/funds (ability) and understand if the borrower has the willingness to pay.

Historically, people who have a clear repayment track record on past loans availed (obtained from a Credit Information Company or CIC) have shown better ability and willingness to pay. With an increasing number of people coming into the workforce with no loans taken in the past, data like telephone and utility bills can be used as a proxy to willingness to make regular payments. Ability is determined by income which can be obtained from bank statements where credits and debits into the account over a period of time can be evidenced.

Based on the applicant profile and the type of loan, data is collected from various sources with applicant consent – bank statements, insurance via the Account Aggregator framework, credit history from the CICs, utility bills from various telecom and electricity companies etc. are processed via complex and segmented credit scores to arrive at a loan decision in seconds. A lender’s existing customers may be pre-approved for a loan based on their current/savings account or past loan history which makes it even simpler to get a loan on demand.

Proliferation of data in digital form, compute power to process complex analytical algorithms in minutes, the India Stack and penetration of smartphones to access the digital network is changing the customer journey and widening the net for access to credit.

As they say the choice is simply between being digital or being obsolete.

(The writer is Consulting Partner – Financial Services, EY)

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