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Advanced Risk Management in Digital Lending: A Comprehensive Guide

Decisions made long ago and often forgotten, can come back to haunt. Banks and financial services discovered this to their chagrin during the 2008 financial crisis. Ever rising customer expectations, aggressive non bank lenders are forcing banks to actively personalize their credit offerings for seamless digital lending journeys. Lenders are looking to mitigate losses, while delivering more financial power to their customers for both retail lending & corporate lending.

How can banks tighten control over risk with precise risk modeling system, while at the same time, deliver borrower delights? This blog explores the crucial steps that can revolutionize risk management in digital lending.

The key pillars to strengthening risk management models in digital lending are-

1. Developing a robust risk ecosystem

You need a digital LOS that can fetch accurate rating and other relevant data, in real time, through seamless integration while performing credit assessment for designing digital lending journeys. This intelligence can be used to fine tune existing risk rating platform and configure external and internal triggers. A strong risk ecosystem can also create an impact analysis on potential changes to macro regulatory, economic, capital and provisional changes. Monitoring can be aided through intelligent analytics, dashboards and real time alerts, notifications with E-KYC.

Imagine a scenario where a financial institution utilizes a digital Loan Origination System (LOS) equipped with real-time data integration. This system not only fetches accurate credit ratings but adapts swiftly to changes in the macroeconomic landscape. For instance, during a sudden regulatory shift, the system triggers alerts, enabling the institution to proactively adjust risk models and maintain compliance. This level of adaptability ensures a robust risk ecosystem that can weather unforeseen challenges.

2. Proactive data management

Data is the lifeblood of a robust risk framework. According to a survey, 62% of financial institutions believe that harnessing data-driven insights is critical for effective risk management. Leveraging digital journey designers aids in creating, capturing, and processing valuable insights from diverse data sources, including social media and emails.

Reliable data is the bedrock for risk management, allowing for efficient robotic underwriting. By maintaining consistency in processing models, financial institutions can fine-tune data models to meet the evolving needs of underwriters. Institutions that prioritize data quality and accuracy experience a 40% increase in the accuracy of risk assessments.

3. Real-time end-to-end visibility

digital LOS platform will give lenders the ability to track new applications with E-KYC and finalize, reject, edit and re-assign applications with real time alerts and status updates for retail lending as well as corporate lending. Credit officers can note down any reasons for credit extensions and mention any deviations while performing credit assessment. This is possible only with end to end visibility that also gives a detailed audit trail for automated regulatory compliance with risk rating platform.

65% bankers consider that risk management is a significant contributor to bank's lending transformation.

Consider a scenario where a digital LOS platform provides end-to-end visibility for lending applications. Credit officers can track applications in real-time, from initiation to completion. This visibility includes alerts and status updates, enabling swift decision-making. For example, if an application deviates from the standard credit assessment process, the system generates real-time alerts. This not only enhances transparency but also ensures that regulatory compliance is seamlessly woven into the lending process.

4. Faster lending approvals through robotic underwriting

Approvals were a major element in disbursal delays. This is changing with visual journey designers that seamlessly integrate with multiple data sources with E-KYC feature. Automating approval workflows allows lenders to flexibly configure credit policies for retail lending & corporate lending while leaving the nuts and bolts to robotic underwriting.

5. Ability to monitor financial covenants

Financial covenants lay down the rules of digital lending for designing impactful digital lending journeys. Lenders can create customizable financial covenants that they can actively monitor in the system. A powerful digital lending platform can identify signs of borrower default through proactive monitoring of a borrower’s financial activities. Lenders can get real tie alerts and status updates to aid quick collections.

A strong risk management is crucial for digital lending. It is imperative that banks and financial services build robust risk through effective risk modeling system and governance as they grow their lending portfolio.