New Normal: Financial Institutions Look For Technology To Revamp Loan Collections With dynamics changing, the ongoing pandemic has also impacted financial institutions, pushing them to relook processes and innovate for the new normal

The impact of the global outbreak of coronavirus is not limited to a few sectors but is evident across all stakeholders of the economy. Millions of people across the world have lost their jobs, small companies and organizations have been profoundly affected during the lockdown period. With dynamics changing, the ongoing pandemic has also impacted financial institutions, pushing them to relook processes and innovate for the new normal. From finding ways to empathetically communicate with consumers, to bringing in an element of certainty in an uncertain and grim collections outlook and most importantly, keeping their non-performing assets to as low as possible. As we pass the post-shock and disruption caused by the pandemic, we will see more financial institutions leveraging technology solutions to improve their debt collections efficiency.

Know it on time: Be on time

Much before the pandemic hit us, many financial institutions were already leveraging machine learning (ML) to analyze a customer's alternate data to assess creditworthiness. However, the new frontier for them is to broaden up the avenue and use data analytics and machine learning to understand any significant behavioral change that indicate events that may lead to a potential non-payment of EMIs. Timely communication with these consumers, at the right moment, using interactive channels in their language of choice, will help financial institutions minimize any unpleasant surprises about loan non-payments.

As a result of these technology implementations, financial institutions are also able to educate consumers about-why they should repay on time and keep their credit scores high for future access to credit. Moreover, by automating a large part of the debt collections process, financial institutions can also bring down the operational costs significantly. This has a direct positive impact on the top and bottom line of the lending institution and makes it more competitive.

Create data as you lend and analyze in real-time to offer credit to all (and build a healthy loan book)

A majority of "new to credit' customers in India, work in the unorganized sector, hence lack credible documentation that can help a lender to assess risk. These people however are not necessarily unbankable, a few NBFCs have taken an innovative approach to solving this challenge by lending small amounts to the new to credit, a lot of times in the form of consumer durable loans, this helps them to create important data points, as these consumers start repaying their loans. The repayment track along with other behavioral data help lenders to assess this new customer's risk profile, allowing them to identify right products for them and at the same time increasing the life-time value of the customer, while building a healthy loan book. These lenders are further taking help of various new technologies in the risk mitigation and debt collections domain to ensure that the inherent risk on these new to credit customers is reduced to a minimum

Having enough understanding of this concept will promote financial inclusion and encourage institutions and individuals to come forward and improve their credit scores. With appropriate regularization, alternative data combined with the expertise of analytics can empower the credit ecosystem, check fraudulent activities and drive smart lending. Thereby bringing several unserved consumers into the formal credit economy.

The road ahead

Various estimates suggest that about half of India's adult population does not have access to formal credit. This therefore, is a huge opportunity for financial institutions to expand their business and bring this potential consumer base within the fold of the formal economy. However, tapping this base requires a significant focus on tech-innovation. Given that the new-age financial institutions are already taking steps in this direction, we can certainly see that India's financial ecosystem is set to grow manifold in the coming days.