How digitalizing credit risk assessment and management can enhance loan origination process?

Credit risk assessment and management is very critical and usually a time consuming step in loan origination process.

So, can banks and financial institutions achieve the double of being fast and yet accurate while doing the credit risk assessment?

Digitalizing credit risk processes will help banks in solving above situation and this will also help banks to deal with pressures caused by constantly changing regulations and investor expectations.

Current scenario and issues faced by banks and financial institutions:

Banks are under a lot of pressure from regulators, investors, competitors and their own customers as well. This forces banks to re-evaluate the cost efficiency and sustainability of their risk-management models and processes. Return on equity in banking remains below the cost of capital thanks to additional capital requirements.

Banks are trying to improve their risk management processes but they are finding it very difficult to deal with sustained pressure.

What makes digitalization of credit risk management a must-have?

Five current trends are forcing change on the existing risk management models:

1. Changing customer expectations

2. Tighter regulatory control requiring greater risk-function effectiveness

3. Growing importance of strong data management and advanced analytics in staying competitive

4. New attackers driving business model disruptions

5. Increasing pressure from financial-technology companies on costs and returns

To grow amidst all this pressure situation banks need to digitalize their credit processes, because lending is still a key source of bank revenue across the retail, small and medium-size enterprise (SME), and corporate segments. Digital transformation in credit risk management will bring greater transparency. Once they get risk under control, banks can grow their business, by using more targeted and risk-based pricing. They can give faster client service without having to make sacrifices in risk levels and thereby effectively manage their existing portfolios as well.

How digitalization of credit risk assessment and management can be achieved?

Proactive and innovative risk assessment models in digital LOS represent a generational leap in risk assessment and rating by creating tighter integration between risk model developers and risk management teams.

Digital loan origination platform has powerful tools that can create and implement intelligent and faster credit approval process journeys, with a robust and scalable lending solution for credit risk management. Banks can empower their staff with intelligent preparatory solutions.

Key elements in digital LOS:

1. Automated decision making

It helps lenders in making the right decisions with customizable, integrated and agile technology that has enterprise level credit risk framework. Complex factors are evaluated with help of easy-to-configure framework which makes it possible to automate credit decision-making.

2. Faster turnaround times:

Digital loan origination system can streamline credit assessment processes with faster turnaround times and has ability to cope with increased processing volumes, while still improving the accuracy of credit decisions.

3. Borrower intelligence

AI enabled borrower intelligence of Digital LOS can create borrower journeys that capture a 360-degree view for both new and existing customers and generate credit approval memos. Digital LOS can seamlessly integrate with external systems and get actionable insights for smarter credit approvals.

Detailed study of borrower is conducted before approving the loan by capturing and analysing financial statements and comparing them between companies and peer groups. Objective and subjective assessment of the borrower is done with different financial ratios like RAROC, Risk Return Ratios, and RWA etc.

4. Integration with credit bureaus

Digital LOS system is integrated with multiple credit bureaus for authenticity. Digital LOS can seamlessly integrate with multiple external credit data providers with in built connectors and can automate routine monitoring of credit bureaus and transactions.

5. Innovative visual designers

Innovative visual designers like Autoflow DesignerTM and Screenflow DesignerTM incorporated in Loan origination platform can create process and integrate with multiple data sources for automating workflow processing and decisions on credit applications. Also writing credit policies and underwriting process can be automated with lot of flexibility provided at configuration level.

6. End-to-end process visibility

Real time end-to-end process visibility is another great attribute of Digital LOS. Staff of banks and financial institutions can track new product cases and finalize, reject, edit and reassign applications in real time with update and notification. They can note rationale behind credit extensions and forecast earnings from the relationships established. A detailed activity trail for regulatory and audit compliance can be created in system. System can generate automated and intelligent insights with timely regulatory and business reporting.

7. Tracking of waivers

Digital LOS can also keep track of waivers during renewals. It allows to create customizable financial credit agreements. System can actively track borrower’s financial and business activities. Real time alerts on ‘technical defaults’ can be generated to accelerate loan collections.

With digital LOS you can also create in-depth standard and customizable and actionable reports. Data can be collated and auto-populate to analyse credit risk at even a minute level.

8. Simulation and stress tests

Multiple scenarios can be generated on digital LOS system to simulate stress tests against historical data sets and we can also analyse the impact of a stress scenario with the smallest of details.

To conclude:

Digital LOS allows banks to conduct loan process smoothly right from start till the end as the most difficult part of risk assessment and underwriting is taken care with specially designed proactive models. Digital credit risk management uses automation, connectivity, digital delivery and decision making to create value in terms of protecting revenue, reducing cost of risk mitigation and reducing operation costs.