N. Mohan: Can you outline the complexities that are involved for banks and financial services institutions in assessing a loan demand? What are the major challenges that Indian banks face in doing an assessment?
Manish Jain: There are quite a few challenges that Indian banks face when it comes to conducting an assessment. To begin with, documents are collected or submitted to banks as well as other lending companies only for the sake of compliance many times rather than for assessment purpose. Additionally, credit assessment is conducted only on papers submitted and not based on the individual’s credibility. Direct Selling Agents (DSAs) are involved in the collection of documents or in the approval process, but these agents are more interested in meeting their targets to sell loans rather than a complete assessment from a long term perspective. Customer KYC is very welcome process but challenge is the implementation of process. It is implemented in such a way that it is a tick mark done rather than actual evaluation based on inputs.
Know your customer business is very important for the banks to evaluate be it, retail, small medium enterprise or corporate asset finance. KYC goes much more beyond a simple proof of identify and proof of address for the banks. KYC business is a critical component of a bank’s risk management framework.
Business pressures are always there for any business, every organization wants growth but important question is at what cost? Hence, holistic understanding of business life cycle and its interdependencies needs to be analyzed with micro and macroeconomics. Historical evaluation of financials can be the only factor to be considered and potential needs to be evaluated. Know your customer’s business risk is critical from the institutions reputation risk perse.
Is credit score the only assessment tool available? Or are there supplementary tools? Can you elaborate on the process?
Credit score is an assessment tool which is widely used and must to have for banks. Credit assessments business process needs introduction of newer tools and technologies to understand the structured and unstructured data for early warning signals during evaluation stage. For example if we have to understand the customer business risk we need to understand the customer’s business life cycle, interdependencies on internal and external factors. I will take few examples of retail and corporate banking.
In retail banking person needs to be evaluated on his potential to repay the loan. Now with the changing demographics and market dynamics potential cannot be determined only on the historical income. Now question is how to access these potential and risks. Social Media listing can help in some way here. For example, applicant’s Linkedin profile can give insights on the career progression about how he has leveraged his learning and experience, what other folks are saying about this person etc. Bankers are always sharp to map these inputs in evaluation. Point to give them these inputs at the appropriate time. Facebook profile can share lot of sentimental insights and there are many tools which can plug in to analyses the sentiment analysis.
Similarly, for corporate customer appraisal, lot of unstructured data is available which can be analyzed independently and be part of credit evaluation process beyond last 5 years profit and loss statement, ratio analysis and balance sheet.
What are the major challenges that Indian banks face today?
Customer demographics and psychographics are changing. For corporate, business models are changing dynamically. Model of business which was appropriate 2 years back may not be the way to do business in the next 5 years. This needs an evaluation at an appropriate time. Traditional credit appraisal models are proven but new methods of analyzing data needs to be plugged in to make this more robust.
Often, there is a role for subjective judgment to assess the risk of a borrower. Do you think the automated systems that are increasingly becoming vogue is eliminated this aspect?
As mentioned above, subjective judgment is a major role to play in assessment of borrower. Earlier bankers and borrowers would meet and discuss face to face. Now, with the changing selling process, customer onboarding process, available channels etc provide newer challenge for bankers. But the good part is that all data and information is available in some or other format and, banks need to align the same.
On a lighter note, recently in one of the conferences a senior banker shared his views on how folks evaluate candidates for marriage using their social media profiles. In India, the tradition for marriage is that family members evaluate the boy or the girl, and before getting into the detailed discussion they evaluate their social media profiles. It is quite similar to credit assessment. It is interesting to see how personal experiences of bankers can be utilized in the professional world.
Automated systems can also help in providing good judgments but banks need to develop a robust and complex scoring system and work with different organizations to get more insights. For example, the credit bureaus.
What about global banks? How developed are the systems they make use of?
Globally, banks are investing a lot of money in technologies for structured and unstructured data mining. Business models are very similar but scoring mechanism is quite sophisticated. Even in India some of the Institutions are approving loans on the fly like by the time you evaluate the product, credit evaluation of the borrower is done parallel which is quite a complex algorithm.
Globally banks are investing in building a simplified front end process and creating the most complex algorithms for credit evaluation with data integrations.
Can you explain the role of social media in undertaking credit assessments? How can this media help banks and financial institutions in this regard?
Social networking such as Facebook, Twitter, Linkedin etc., provide an opportunity to view various details that are then required to approve a loan application, subject to the person updating all the requisite information.
Social networking helps in better credit assessment by looking at the lifestyle, friends, likes, dislikes and behavior pattern etc. Banks, credit card issuers, mortgage companies and other lenders can also look at scoring for various parameters which are available as part of social networking and add these also as part of assessment. They have altogether a new source of information which can help them in better credit assessment.
A person who spends good amount of time on social networking and generally who does not make their information known to everyone is providing a chance to data mine their lives.
Details generally provided by the customer to obtain loans are as follows:
· Employment details
· Education details
· Years of experience
· Salary details
· Current expenditure including existing loans if any
· Dependent/co obligant details
· Existing loans/account details
The existing loan application forms/details requires the customer to provide details required only from a loan point of view whereas social networking helps banks to obtain additional details such as their likes for music/books/movies/games/sports, hobbies, their friends/relative circle, their behavior pattern, their travel tales, events which they have participated, etc.
For example, if a customer approaches a bank/financial institution for a personal loan and the institution conducts a credit assessment/appraisal using social media, it can check all the required information for sanction of loans such as:
· Current Salary/CTC details
· Age, Gender, etc.
· Dependent details
· Current/past employment details with total experience
· Education Qualifications
· References
· Income/expenditure details (These details can be captured as additional information in social media)
· Asset details (These details can be captured as additional information in social media)
Currently many users may not update or provide these details through social media, but moving forward when a bank uses this data for credit assessment, the user would definitely update all these details. With regard to financial details, users may restrict the view access to only specific users.
Additional details which can be checked by Banks/Lending agencies include:
· Since how long customer had their account in social media
· How strong is their association in Social and Professional life
· How diversified is their association
· How much do they keep interacting with their friends, relatives etc.
· What kind of interactions and sentiments are there.
Do you think social media has matured enough to be considered a reliable medium for banks and financial services institutions to depend on it for the appraisals?
As I mentioned earlier, subjective assessment is a must and understanding the customer business and its risk is key for any assessment. Now, the challenge is that the customer is not in front of you to discuss and give more insights about his lifestyle, personal and professional information but his social profile is available for evaluation. As the world is moving to the digital age, information is also moving to various channels and banks have to look at the ways to access the information from where it is available.
What are the major advantages and the disadvantages?
Advantages of social media for credit assessment
There are a number of advantages associated with credit assessment through social networking. Firstly, there is no additional cost involved and it does not take much time for additional assessment. Social networking provides an opportunity to spot behavior of the customer which can help in giving a broad picture of the credit risk.
While customers may not explicitly mention about their credit needs, social media provides a platform to understand more about the customer’s behavior rather than just depending upon the papers. In case bank is able to find some negative factors during credit assessment through social networking they can be more cautious or can cross check with the customer/friends and be more vigilant.