Industry experts discuss the current trends, innovations, scope, & direction of Loan Origination Systems in the finance sector:
Loan Origination System (LOS) has become a buzzword among the banks and NBFCs in recent years in India. LOS is a compilation of software solutions that automate commercial loan origination workflows at a financial institution. Technologies like AI and ML have helped in the advancement of It helps in automation and to manage the end-to-end steps in the loan process – from the application, through underwriting, approval, documentation, pricing, funding, and administration.
While these steps may vary at each institution, every bank or NBFC works through a similar process to approve loans and maintain a lending relationship. Finance companies use LOS to provide good customer service and to improve the borrower experience.
IIFL Finance has leveraged its in-house capability to develop its own loan operating systems, with the evolution in its policy and processes and in-house system. Currently, its retail home loan process has moved to proprietary application ‘Jhatpat Loans’.
Abhishikta Munjal, Chief Risk Officer at IIFL Finance explains the functioning: “Our sales executive creates a loan application through ‘Jhatpat Loans’ application and with built-in rule engines, an in-principal decision is received on a real-time basis. Such approved cases then move to the verifier’s module in LOS for final decision. Within this LOS, rule engines have been developed leading to system-generated standardized decisions. The entire capability is developed by our expert technical team.”
Shriram City Union Finance (Shriram City) has developed its in-house LOS, called UNO. The company has invested in technology extensively over the last 10 years and has seamlessly delivered superior outcomes using platform.
Unnikrishnan, Chief Digital Officer, Shriram City Union Finance says: “The LOS which started as a desktop version, today is available on mobile devices and we have adopted a bring your device (BYOD) model too. This has helped us during the pandemic when work from offices was restricted and made the lives of marketing executives easier. Today, 70% of the Shriram City’s loan origination takes place on a handheld device (HHD).”
Beacon LOS is a product of Speridian Technologies. One of its USP is that it comes with a what-if analysis capability. This helps prospects as well as DSA/agents to arrive at the best-suited product for certain specific requirements of the customer. Vinod Puliyakote, Vice President – Banking Solutions at Speridian Technologies explains further: “We understand that customers are diversified and comes with many specific conditions and requirements to suit their needs. Beacon, with the what-if tool, accepts various parameters from the user and recommends the product. Also, it allows the user to tweak any or all of these, helping them arrive at the optimum solution to find the best-suited product.”
“Now we have added AI capability to the what-if tool. On getting the requirements, the tool uses its ML capability to analyse the previous data patterns and find the best-suited product for the customer as well the company,” adds Vinod.
NEW PRODUCTS IN LOS
During the pandemic, Shriram has used 2 main principles to bring about changes in the way they used to do the business – the company focused more on ‘customer experience’ and ‘ease of daily operations’. The NBFC has made immense changes to ease the lives of its customers. Unnikrishnan said: “We have designed a DIY journey for booking an investment which ensured that a fixed deposit is booked in less than 5 mins. Shriram City and Shriram Transport Finance together raise record retail FDs worth Rs2 billion in July backed by ramp-ups from digital FDs.”
He maintains: “We are India’s second-largest 2-wheeler financer and intend to make a difference in this segment. Hence a new DIY journey is designed whereby a customer can apply online and obtain an in-principal sanction letter on the fly.”
Shriram has introduced initiatives that has helped its customer to finalize a vehicle from the convenience of his home as he is aware of his eligibility. The BRE’s, with the inputs from multiple data sources, helps the NBFC to arrive at loan eligibility. Unnikrishnan adds: “We have introduced an online personal loan for existing customers which helps the customer to avail a personal loan swiftly. All these products are AI-enabled and help us in faster procession with better precision. We are working on innovations constantly and we will launch couple of new products soon. This will help us to offer a bouquet of online products to our customers. We endeavour to take online lending to tier 2 & 3 cities.”
During the pandemic, the cash flows of a lot of people were affected. Even people who always had immaculate repayment track found it difficult to sustain their livelihood. Hence, with an intent to help its existing pristine customer segment, IIFL Finance launched a pre-approved ‘COVID Relief Top-Up’ product. Abhishikta reveals the details about the product: “COVID Relief Top-Up is an auto sanction and auto disbursal product with no manual intervention and hence enhancements were done in existing LOS. In-house technology capability helped us achieve these system tweaks in a very short duration of time.”
PARTNER LED LENDING
Beacon LOS provides lenders with the option to onboard outlets or e-commerce providers as another channel and treated as agents. BNPL provides a good opportunity for to lenders to expand business by identifying the needs of their best customers.
According to Vinod, tie-ups with retail outlets or with online e-commerce portals can be utilized as a revenue generator. Customer authorization, product recommendation, basic data capture all is automated. The loan within a certain threshold limit will get approved without any manual intervention. All these works are based on the policy definitions that are done in the software and it comes under the responsibility and ownership of the concerned user of the solution. He maintains that all these activities work in the sound and robust platform of Beacon and are secured. Authorizations, approvals, audit trails, escalations, exceptional transactions alerts, etc, are provided in the system to ensure security part.
CHANNELS & CREDIT SCORING METHODOLOGY
IIFL Finance is strategically inclined towards in-house sourcing with around 90% leads being sourced through its on-roll feet on the street. Other channels used by the company are direct sourcing agents, customer walk-in, cross-sell, etc, that add to balance 10% of the leads. There were no major changes in the credit scoring methodology used by the company during the pandemic. However, the company has enhanced its existing bureau checks where they have been very cautious on the frequency of loan inquiries and type of loans as well as overall DPD trends.
Abhishikta says: “We have enhanced our customer authentication capabilities thereby verifying the customer credentials and documents digitally. This helped in enriching the underwriting rule engines further during the pandemic.” In the last 18 months, Shriram City Union Finance has seen a paradigm shift in customer behaviour. The company believes that it is mainly due to the pandemic which pushed people to approach business from a different angle and an overall increase in millennials opting for loans who are tech-savvy. “There has been a sizeable increase in the number of customers approaching us for a loan through our website and B2C app. Our social media-driven loan applications have been rising. The presence on social media platforms has also resulted in a tremendous increase in online loan applications,” says Unnikrishnan.
Beacon LOS works in sync with multiple channels. It provides lenders multiple ways of sourcing loans such as via their website, mobile app, social channels such as Facebook ads, WhatsApp campaign, business tie-up with retail chains, e-commerce portals for BNPL, and the like. Vinod explains: “Traditional channels such as branches, DSA, other agencies are always there. When the FI introduces a new channel easily that is configurable by the company and BEACON LOS starts accepting inputs from the new channel also.”
Beacon LOS is flexible and FI can use their legacy solutions as it is without disturbing the front-end operations. Vinod says: “Comprehensive analytics is provided to the management providing insights about which is channels performing better, in which area, among which product, among which group of customers, etc. AI-based intelligent recommendations can be provided to the business heads so that they can formulate the strategy on business growth.”
NEW TECHNOLOGIES IN LOS
AI has been the backbone of innovations at Shriram. The company has introduced a lot of AI components to increase accuracy, reduce TAT and improve customer experience. Facial biometrics and liveliness checks has helped the company to detect and prevent frauds and facilitate the ease of KYC.
Unnikrishnan shares the details: “Bank statement analysers have enabled express credit underwriting and helps nullify human errors. Inputs from govt agencies through API-based integrations help us to make an informed decision in minimal time. The OCR enabled forms has helped the customer to avoid the mundane task of form filling and reduce data entry errors.”
Abhishikta says: “IIFL Finance is moving towards automation of decisions and since there is a buzz in the market that data is the new oil, so as an organization IIFL Finance is also looking to use advanced AI & machine learning tools to eliminate subjectivity and human bias from our decision mechanism and move towards a more data-backed decision model.” The company is also trying to explore other alternate data channels for capturing additional data and using the same in our decision mechanism.
A variety of data needs to be captured for Loan application processing. Multiple platforms like Aadhar, GST portal, Income tax portal are now matured enough and provide interfaces to companies like Beacon to provide seamless data sharing. Financial statement analysis companies, credit bureau companies, C-KYC portals also provide required data now. Vinod shares: “All these are helping lenders and solution providers like us to become smarter in providing the needful to the end customers. This has brought in more efficiency in the whole system such that it has become less error-prone, more secured, fewer frauds, faster processing, lesser data duplication, reducing duplicate efforts, etc.”
Beacon suite collects data, and its analytics platform creates data warehouse for providing actionable insights to the management. Then the data is transferred to the data lake for the company for more flexible analysis using big data tools and AI/ML capabilities.
OPPORTUNITIES & CONSTRAINTS
Co-lending has been introduced to support banks to garner priority sector business. IIFL Home Finance has expertise and experience in affordable home finance. With digital underwriting providing lower turnaround time, companies are focusing on the PSL segment. According to Abhishikta, low ticket loans do not thrive in the banking industry primarily due to 2 reasons: (i) high possibility of NPA as the loans cater to the low-income group and (ii) high operational costs associated with maintaining the loan. This is because the resources allocated are equivalent and sometimes even more than a higher ticket loan to service and maintain the loan through its life cycle.
IIFL Finance has 15 years of experience in the industry with a curated underwriting team and technologically abled underwriting process.
“Under co-lending, we have already partnered with a few banks and are continuously in discussion with more banks to partner at the low cost of funds, to expand the reach of affordable funding further and pass the true benefit of digitization to the end consumers,” says Abhishikta.
Unnikrishnan believes that there is a lot of untapped potential in the co-lending space. Today majority of the SME loan proposals are rejected due to inadequate financial history or collaterals. The fintech uses technology and risk models that focus on alternate/surrogate methods for scoring customers.
He further added: “In the e-commerce space the anchors are in a position to provide a lot of financial information of the merchant. These inputs help in arriving at better credit underwriting norms which were predominantly based on inputs from the bureau. This approach helps the customers who are new to merchants in a large way.” Companies need to use each other’s strength to grow and offer customized solutions to customers. Co-lending will help them in this direction, and it will give them more customers access to credit.