3 Goal Posts for Digitalizing Credit Risk Assessment and Management

Introduction

Barely a day goes by without the financial sector being in the news for the wrong reasons. Pitiful return on equity, additional capital requirements, fines for regulatory non compliance and dismal cost efficiencies. This brings in sustained pressure from customers, investors, regulators and competitors.

How can banks get tighter on risks, deliver targeted risk based pricing and faster credit servicing without compromising on effective risk management? By digitalizing credit risk assessment and other processes to improve efficiencies and reward ratios of their risk management models. 

The five challenges

Traditional lending is a nightmare. Personal biases, manual underwriting processes, lengthy turnaround time, and cumbersome documentation gave lending a bad reputation.  Digitization of credit risk assessment is being made imperative by the below five challenges 

• Dynamic customer expectations– Bankers are walking a thin line between rising expectation of instant fulfilment and risk management.
• Stricter regulations– Banks have paid more than $200 Billion in fines since the last financial crisis. They have to raise additional capital to confirm to Basel AML and BCBS 239.
• Rising importance of advanced data analytics– Increasing prevalence of automated decision through pattern recognition, targeted segmentation with machine learning etc.
• Increasing competition with fintech– New entrants in the financial sector are using digital technologies to effectively manage borrower risk, thus putting the traditional banks on the back foot.
• Increasing pressure from investors– Tighter regulations have added to cost overheads of banks. They are coming under increasing pressure to rein in their cost overruns from investors.

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.

There are three main goals that digital risk management can achieve.

1. Safeguarding revenue

• Real time automated decisions– Automated decision engine empowers lenders in making the right decisions with customizable, intelligent technology that has enterprise level credit risk framework. Complex factors are evaluated with help of easy-to-configure, drag and drop robotic journey builders. This enables financial service providers to meet customer demands for digital fulfilment.   
• Faster turnaround times– Digital loan origination platform 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. This drastically minimizes the loss of good credit worthy customers to slow manual processes.
• Self Service Capabilities– Customers today put a premium on convenience and instant fulfilment. A robust lending platform, with automated process journeys, decision engines, and intuitive screens can empower customers with intelligent self-service application journeys. This can deliver faster turnaround times and increase processing volumes.

2. Increase underwriting accuracy

• 360- degree borrower intelligence– Digital LOS can create borrower journeys that capture a 360-degree view for both new and existing customers and generate credit approval memos. It takes advantage of machine learning and advanced analytics for identifying borrower patterns, conducting and objective, subjective assessment of borrowers through different ratios like RAROC, Risk Return Ratios and RWA.
• 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.
• Simulation and stress tests– Multiple scenarios can be generated on digital LOS platform to simulate stress tests against historical data sets and we can also analyse the impact of a stress scenario with the smallest of details. Bankers can reduce judgement related errors and increase the accuracy of risk models with real time data processing, digital risk reporting and taking note of forward looking risks.  

3. Reduce cost overruns

• Seamless Integrations with multiple systems including credit bureaus– 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. This eliminates window hopping and ensures that agents spend time and resources in engagement increasing activities.
• Innovative visual designers– Innovative visual designers inside a loan origination platform can create lending journeys and integrate with multiple data sources for automating workflow processing and decisions on credit applications. Automated credit flows can also eliminate manual data loading errors.
• End-to-end process visibility– Real time end-to-end process visibility is another great attribute of a Digital LOS. Staff Bankers 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.

Digitalizing credit risk management brings greater transparency and accountability in effectively managing risks. With a tighter grip on risks, bankers and financial institutions can expand their lending business, through more targeted risk-based credit pricing and quicker fulfilment through automated decisions.