Revolutionizing Lending
In the earlier sections, we discussed the basics of Fintech, how the fintech industry has grown in the last many years and the key definitions used in the fintech industry. There are many verticals when we talk about Fintech industries like lending, insurance, wealth management and so on.
In this article, we shall focus only on one industry segment, the lending industry. This may also be called a loan, line of credit or any other kind of credit facility provided by the fintech players.
Table of Content
- Understanding various kinds of loans
- Consumer loans
- Gold loans
- Personal loans
- Auto loans
- Business loans or MSME loans
2. How to be a real Fintech or digital lending institution
- Customer acquisition
- Application, website, and/or app
- Verification APIs
- Credit underwriting
- Automatic scorecard
- Credit Bureau Integration
- Auto-analysis of Qualitative parameters
- Disbursement
- Loan servicing and monitoring
- Collection or recovery
- Legal
- Accounting
- MIS generation
Understanding Various Kinds
of Loans Aggregated By Fintech Companies
A fintech in the lending space may cater to various kinds of
requirements which can be broadly categorized as follows. Let us understand these loans briefly from a Fintech point of view and how the credit facilities are approved or provided by them.
Consumer Loan
Consumers generally apply these loans to purchase consumer
durables like television, fridge, washing machine, mobile phone and so on. Mobile phone purchasing is one of the largest industries in India since these phones are purchased over the counter. The time frame to approve a loan is very short. Hence, the decision to provide
credit is taken based on the credit Bureau history of the borrower and their KYC. The consumers may offer no financial statement, data or documents as the ticket size is minimal. Basic KYC verification and credit Bureau history are used for providing consumer loans. In India, Bajaj Finance and home credit finance are two significant examples of companies providing consumer loans using technology.
Generally, these loans are provided by a tie-up with the manufacturers or the retail stores and sold as interest-free loans. In most cases, the manufacturer or the dealer bears the interest cost, also known as interest subvention. Hence, for the consumer, it is a quick loan without any hassle or providing too many documents. At the same time, it is also very attractive for the consumer as they do not need to pay any interest on these loans.
Gold Loans
These loans are opted by many people who are unable to get any credit facility or loan due to lack of income proof, or poor credit history. This loan is also taken by people who need finance for a short time, who need the money immediately to meet some emergency. They avail the loan facility by pledging their gold. Other than the banks, some
traditional lending companies provide loans against gold. The major NBFCs are Manappuram Finance and Muthoot Finance. However, new age tech-driven gold loan Fintech companies like India Gold and Rupeek have made space in this space by offering customized, tech-driven solutions to the people seeking gold loans.
The process and key features of gold loan Fintech companies are:
- Mobile app-based process, customers download the app on their mobile and apply for a loan. The customer can choose
the date, time and venue for the gold loan representative to
visit. - The movement of executives visiting the gold loan borrower
is tracked by the technology built by gold loan fintech
companies, like how food delivery companies do it. The
customer knows when the executive will arrive to pick up the gold. The company can also track when the executive returns with the gold delivery to the bank or the company’s office to deposit the gold. - The process of assessing the gold in terms of quality and
weight is also tracked online through the mobile application. - During this time, the credit manager verifies the data and
information of the borrower and approves the loan once the
gold information is uploaded in the mobile app. - The customer gets a notification on the mobile application. They accept the terms and conditions of the loan agreement and sign the contract digitally.
- The fintech company transfers the funds for the loan amount
to the customer’s account through the Escrow account
mechanism, as most Fintechs tie up with a bank or an NBFC
to provide finance against gold.
While from the lender’s point of view, Gold is a safe asset to
hypothecate and is generally considered liquid in case of a steep price fall, sometimes liquidity may be an issue. There are quality issues sometimes when the lender needs to sell the gold in the open market.
The valuation of Gold in India is driven by international prices (in USD) and local demand and supply situations.
Personal Loan
These are the loans applied for and availed by people who are
primarily salaried or self employed. The requirement of a loan may be to meet any sudden or unexpected expenses or sometimes planned expenses. Many fintech aggregators are facilitating personal loans in
a grand manner in India. Personal loans are categorized into various
segments based on loan amount and loan tenure.
- Ultra-small loans for ultra-short duration — Say Rs 500 to Rs 5,000 loan for 15 to 90 days. The entire amount is repaid on maturity. In the case of salaried customers, they are also known as payday loans and are payable from the immediate next salary amount.
- Small ticket loan for shorter duration — Say Rs 5,000 to Rs
50,000 loan for 90 to 180 days. These loans generally may be
repaid in 3 to 6 installments. - Regular Personal Loans (PL) — These are standard personal
loans approved based on the borrower’s income, which is
derived from the salary sheet, income tax return, or any other documentary proof. Generally, the loan amount for such loans
may vary in the range of rupees 2 lakh to 10 lakh. For these
loans, assessment is done based on bank statements, income
tax returns and salary details.
The credit decision can be taken quickly for all loans under personal loans because most of the required data is in digital format. A fintech entity can analyze the entire data within minutes. The whole process of customer acquisition, verification of data and information, approval
of the loan and disbursement of the loan is done in just a few
minutes. While the banks and NBFCs do this directly through their mobile application, some fintech companies do the processing, but on the backend, the ultimate funding is done by a bank or an NBFC. The fintech Entity integrates API with the lending institution to smoothen and fasten the process.
Auto Loan
The application process for auto loans is relatively similar to that
for personal loans however, because the vehicle is an asset that is hypothecated to the lenders, the emphasis is more on that asset in
this category, which is the vehicle. The borrower’s income is taken
into consideration easily.
- Two-wheeler (2W) loans are given for used and new bikes/
scooters. - Three-wheeler (3W) loans for used and new auto rickshaws.
- Four-wheeler (4W) loans are for buses, trucks, cargo/ goods-
carrying vehicles and new transport vehicles. - Electric vehicle loans: While these also can be 2W, 3W and
4W loans, the category is defined separately and the Fintech players in this industry are also separate.
- 2 wheelers or e-Bikes
- 3 wheelers
- rickshaw – passenger
- E-rickshaw – cargo/ loader lower category (L3)
- E-rickshaw – cargo/ loader higher category (L5)
- 4 wheelers trucks and buses
Most of the driver cum owners who buy vehicles for commercial
purposes, especially electric vehicles do not have sufficient data or financial statements hence the process adopted by the auto fintech companies is a little different.
Business or MSME Loan
The products offered by these fintech players may be B2B Business to Business or wholesale segment, B2C Business to Consumer or Retail or D2C Direct to the consumer or directly from Manufacturer to the Consumer products. Within this space, the products offered are.
- Working capital finance — The credit facility is given in the
form of term loans. These term loans may be secured by
taking some collateral or unsecured loans, which are given based on the borrower’s cash flow. The cash flow is assessed based on the bank statement provided by the loan applicant where the companies can track the purchase and sale transactions. This is also supported by GST returns or other financial documents and statements. - Line of credit — One of the most used products by fintech
players is channel financing or dealer financing, based on a
relationship created with the larger corporation, which may
be an FMCG company or a manufacturer. The credit facility is provided to the vendors of larger Corporates or suppliers. In the case of channel financing, the line of credit or credit facility is provided to the manufacturers’ dealers. The product offered to the dealers is also called or understood as a B2B line of credit or credit facility.
The Process flow for business loans is similar to personal loans
however, the significant difference is an assessment of income. In the case of business loans, there is no salary slip available. In such cases, the evaluation is based on other financial documents like an income tax return, GST return, and in some cases, from the business’s cash flow.
The credit underwriting process flow for MSME loans.
Some of the key Fintech lenders in the MSME space, along with their
products.
How To Be a Real FinTech or Digital Lending Institution
The Key ingredients for building lending Fintech:
- Customer acquisition or sourcing
- Application, website, and/or app
- Verifying APIs
- Credit Underwriting
- Automatic scorecard
- Credit Bureau Integration
- Auto analysis of Qualitative parameters
- Disbursement of loan
- Servicing and Monitoring
- Collection
- Legal
- Accounting
- MIS generation
Customer Acquisition and Sourcing
The first and most important question for any fintech is how to acquire clients. There are various methods or sources through which a fintech acquires its customers, some are given here for better understanding. The customer acquisition process may differ for each lending institution depending on their product, the area in which they operate, the customer profile, and so on. It would be difficult to explain the process of every e-product and type of business; hence I have tried to explain the process for a small business loan for MSME focused lending fintech. While this is explained and focused on a business loan, the customer acquisition process by a fintech remains the same.
Acquiring the Customer Digitally
- Mobile application
Most of the fintech entities servicing retail customers in
any segment would need to develop an excellent Android mobile App detailed features are listed separately. People
should be able to download and apply for the loan through a
mobile application. This is the most commonly used method
of acquiring customers. A Startup may develop only the
Android app as the low economic status borrower generally does not use iPhones; hence iOS application can be developed at a later stage. The advantage of mobile applications is that it can capture a lot of information and data from the prospective customer in the backend. - Website
People should be able to directly go to a website to apply for the loan by registering themselves or with a social media login Facebook or Gmail on the website. This is useful
for locations where people may not have smartphones to download an application. Nowadays, mobile-friendly
websites can capture the required data or information. - Digital Marketing
Digital or online marketing is a powerful tool that has
emerged recently for customer acquisition. Digital marketing
can be done through email, Facebook, text messages with a
link for smartphones, authorize and WhatsApp. These will
have links to take the user to a website or to download mobile
apps and then apply for a loan. Lot of Fintech entities are also
using QR code technology to provide and to get information
from the customers. While digital marketing is a great
tool, the company should be careful about customer data
protection, data privacy and spamming. Digital marketing
is very cost effective even if the success rate is quite low in
percentage terms. - Online agents
Many companies like ‘India Lends,’ BankBazaar, Loan
Adda, Paisa Bazaar and so on, are Direct selling agents
. They gather information on their portal or mobile
application. The lender NBFC or Bank can tie up with them
and have API integration so that all the information and
documents directly come to the lender and get integrated
with their loan management software for further processing. This is one of the most important sources for lead generation and conversion. This integration must be very flexible and smooth for better services. - Corporate tie-up
Tie up with large and medium size corporations like E-commerce platforms Amazon, Snapdeal, Flipkart, Nykaa and so on, Food delivery platforms Zomato, Swiggy or large restaurant chains, and so on Auto Tech platforms Droom, Cars24, Cardekho, and so on B2B platforms Moglix, IndiaMart, Udaan and so on. Travel platforms MakeMyTrip, ClearTrip, EaseMyTrip and so on, Hotel and stay Oyo and so on and grocery aggregators shop kirana can help acquire customers. While the previously mentioned platforms are enormous and commonly known to people, a Fintech lender can get a better deal with the focus on 2nd/ 3rd layered platforms to fund their customers/ dealers. The data shall directly come to the lender’s platform and get analyzed for credit purposes. The advantage of doing corporate tie-up is that a
lot of data is already available with these platforms, which are verified, authenticated, and analyzed by the platform itself.
Hence, it can be trusted. The cost of customer acquisition by this method comes down drastically and the scalability of the business is significantly higher. - Co-lending lead generation
An MSME focused NBFC can also tie up with other banks or
larger NBFCs to generate business for co-lending. Different lenders have different lending criteria; hence the software should be able to support such different parameters. The lending can be done both ways where, on one hand, smaller NBFCs can generate leads for you and on the other hand, you can generate leads for larger lending institutions.All the leads generated should be stored in one place with
status. Whatever is incomplete, rejected in other words – not
sanctioned/ funded or not eligible should be followed up
on later. The sales team should automatically get reminder
messages to complete applications, eligibility or other marketing messages as needed.
The sales team should also get some notification with a lag of
3 months or all unconverted leads for follow-up. Using the
Data most effectively is the key to success.
Application, Websites or App
Application login through Gmail, social media, and so on allows the user to seamlessly log in to the mobile application for the website without creating any new login credentials. At the same time, this also provides authenticity to the Fintech about the profile of the loan applicant.
Document upload
The mobile application or website must have a feature to upload the
essential documents by the applicant, while the document list may differ for each segment of the customers. The standard documents are KYC documents and some financial information/documents. The platform should not only allow uploading these documents but also have back-end integration to verify the authenticity of the documents uploaded.
OCR Technology for documents uploaded
Optical Character Recognition Technology is critical in
today’s world. In my view, it is important to give a very comfortable journey to the users so that they need to type minimum information manually, and the technology platform should be able to read the data from the documents provided and create the text. This text is used to fill up the application form automatically.
- Aadhar – upload and Auto Verification (possible through
API). - PAN – upload – auto read and Verification (possible through
API). - Bank Statement and cheque – Verification.
From the preceding three documents, you can read the name of the applicant, father’s name, date of birth, full address along with area code and all the bank details like Bank name, bank branch name, account number, account holder name, IFSC code and so on.
A good OCR technology can automatically read all the information and fill it up in the application form of the lending institution. For verification and authentication of the information in the documents, the Fintech can develop its own software and subscribe to various services or do an API integration with a service provider who can provide such services.
Other Documents where OCR technology can be used could be a Voter ID card, Driving License, Income Tax Return and so on.
Verifying API’s
One of the reputed organizations providing API services in India
is Karza Technologies Pvt Ltd which is suitable for all lending
businesses. A tentative list of various APIs offered to providers is given as follows. The list of APIs is just a sample and this is not an
exhaustive list.
The key APIs required for Auto Loans.
The key APIs required for Business and MSME Loans.
Key APIs required for personal loans and business loans.
Key APIs required for SME loans to corporate customers.
Key APIs required for personal loans to salaried people.
WhatsApp APIs
The latest in Fintech is linking the entire customer journey with
WhatsApp, wherein the customer can apply for a loan, provide
required documents, avail the loan, and make payments using
WhatsApp messenger services. The companies need to avail API
services of WhatsApp for this purpose.
SMS text and email notifications
Fintech usually sends text messages, emails and WhatsApp notifications wherever available for all the critical steps in the customers’ journey. For example, application received, eligibility confirmation whether the customer is eligible for the loan, initial approval or rejection, loan sanctioned, loan disbursed, EMI due and so on.
Co-Applicants For Guarantors
Many companies also ask for a co-applicant or guarantor of the
loans, especially when the loan is unsecured, or the loan amount is
substantially higher.
Documents upload, verification, and so on must be done for the co-applicant and/or Guarantor spouse/ parent/ child of the loan.
The website/ mobile App shall be integrated/ synchronized with the entire software system on a live basis. It will be secure with a user ID
and Password. Users can see the application status and then the loan status on a live basis to track their payments and dues amounts.
The applicant’s the borrower’s user experience should be seamless,
straightforward to apply form and should require the least amount
of paperwork and information possible.
Credit Underwriting
Underwriting is the most crucial task for a lending fintech. While
traditional banks have a standard method of granting credit facilities based on financial documents provided by the borrower, fintech
entities try to assess the ability to pay and the intention to pay
through an alternative method.
Generally, this alternative method is understanding the customer
profile based on certain pre-set parameters like understanding their personal information, social information through digital footprints, use of phone, actions on various social media platforms, analyzing the financial and non-financial text messages, understanding the mobile applications installed on the mobile phone, understanding
the call behavior in terms of calls made, calls received, calls missed, duration of the call and so on.
The primary difference between Fintech and traditional lending
institutions is the underwriting. Traditional lending institutions
give very high weightage to credit Bureau scores, also known as
CIBIL. In contrast, Fintech gives higher weightage to the alternative scorecard, which lowers the weightage of the credit Bureau score. The customized alternate scorecard decides the loan amount, interest rate and loan.
Automatic ScoreCard
- Different kinds of scorecards for various products — As
mentioned previously, the scorecards are customized
differently for each product based on the profile of the
customer and the segment in which the company operates.
For example, the scorecard for a personal loan would differ
from that for auto or business loans. - Dynamic nature of questions with artificial intelligence — The scorecard has to be dynamic using machine learning and artificial intelligence based on the responses received on the
questions created in the scorecard. The questions and their answers need to be revised from time to time by analyzing
the portfolio. - Flexibility to make changes on a regular basis — There has to be flexibility created in the scorecard mechanism, calculations and algorithm so that it remains very dynamic, and the users should not be able to predict the score created by the scorecard. The weightage of various parameters also may be changed on a regular basis based on the performance of the portfolio.
Variables Field in the Scorecard
The number of questions and fields created in the scorecard should have more unique queries and variable values. You must be able to add queries to our questions, delete them, remove them and change the value of responses.
Social scoring
While India’s digital footprint is not very high, the social scoring
can be based on Facebook, LinkedIn, Instagram, Twitter and other social media platforms. This tool is effective for ultra-small amounts of personal loans. But it may not be beneficial for business loans for large amounts of loans.
The credit decision on the loan amount or interest rate can also be taken based on the mobile phone data contacts, calls, no of/ kind
of apps downloaded and so on, which can be parameters to arrive at the risk profile of the customer.
Benchmarking of score card with other companies
This is one factor that every Fintech must take care of while making its scorecard. It has to be benchmarked and should be as per industry standards. You cannot be highly conservative or liberal while making the scorecard algorithm. Benchmarking the risk parameters used in the segment you operate is essential.
Auto FI and FCU requests
Field investigation and Financial Control Unit are two important processes run by most lending institutions, even if they use
the technology extensively. These processes are preferred, especially by companies doing business loans where the digital footprint is low and the loan ticket size is large. FI means sending an independent third-party vendor in person to the residence, business place or workplace of the loan applicant. The FI agency verifies basic details for the applicant and checks if the person is staying and working at the place they have mentioned. They also confirm it from the neighborhood and submit the report along with pictures. FCU means a third-party vendor who independently checks other financial documents submitted by the applicant. These documents may be bank statements, income tax returns, and so on. The agency confirms that the bank statement is correct and the bank account is active. Similarly, it also ensures that the other financial documents
submitted by the applicant are genuine.
There may be multiple vendors providing this service to the fintech company. So, while building the Tech platform, it should have the feature to request generation for FI and FCU reports to the vendors. The request must be sent randomly if there are multiple vendors to avoid any preferential results.
Credit Bureau Integration
Credit Bureau analysis is another key ingredient while creating the
landing platform. There are four credit Bureau agencies in India,
namely.
- TransUnion Credit Information Bureau (India) Limited or
CIBIL. - Equifax
- CRIF High Mark
- Experian
These agencies provide API integration facilities with your software system so you can automatically pick up certain information from their reports and run tools to analyze the data provided by them. The Tech platform should not only be able to send the request to these credit agencies but also pick up the data and take it to the alternate
scorecard to arrive at a final scorecard for the customer. Some of the examples of information that can be fetched from these bureaus are.
- The overall credit score
- Total loan outstanding
- Loans overdue with 30 days or 60 days, or 90 days
- Amounts written off
- Number of running loans
- Number of inquiries done in the last one month or a specified
period
Credit bureau score and other information are checked to analyze the applicant’s ability to pay and intention to pay. It is not just about the scores. If there are overdue smaller amounts for genuine reasons, the underwriter may ignore them. However, if there are loans written off, this may be a cause for concern. Similarly, too many inquiries in
a month reflects the customer’s desperation. A lending fintech would build its rule engine based on these parameters.
Auto analysis of qualitative parameters
The qualitative parameters mean the non-financial parameters
related to the person’s personal and social behavior. This can be
captured from the social media activities of an application installed on the mobile phone. In the case of field investigation or FIR, the same can be charged by observing various activities of the applicant. The scorecard should include data on all the personal and social information and provide a particular score based on the activity’s importance. It is important to automate this process and not provide discretion to these parameters because different credit managers may consider social behavior differently.
Integration with the third party for fraud detection
In addition to the credit bureau and KYC verification, other service providers provide analyses for underwriting and fraud detection. This is to provide customer behavior with other lenders for any fraudulent activity or legal cases faced by the customers. The Tech platform built should also explore API integration with such vendors for better underwriting.
Various agencies and tools provide an early signal of possible fraud
risk, and Fintech can get those by API integration from these agencies or service providers. For example, there may be duplicate PAN in one person’s name, duplicate property papers or multiple addresses in credit bureau reports and so on.
Scoring of PD report separately by the credit team
PD stands for Personal Discussion. This is applicable when the
credit manager is visiting the residence for the borrower’s business premises, especially for large ticket and business loans. The idea is to provide a customer profile separately, assess the risk, and create a score for the personal discussion report given by the credit manager. The report issued by the credit manager might be different from the data and information captured by the system digitally.
Scoring of FI – home and business
As stated and explained earlier, the field investigation report also
should be included in the credit score. The observations mentioned in the report may be standardized with the scope provided to them.
This may not be applicable for small ticket personal loans where a lot of other information is available digitally.
Scoring of sales visit report
In most business loans or MSME loans, initially, the salesperson visits the customer where the customer acquisition may not be completely digital or through a mobile application. In such cases, some of the questions should be mandatory and given weightage in the scorecard.
It is essential to compare the visit report of the salesperson, the field Investigation Agency and the credit manager. If there are any discrepancies or differences for mismatch, it should be verified.
ROI matrix – risk-based interest rate
As explained earlier, the scorecard created by taking various variables will reflect the customer profile. Based on this, the lending institution can decide the rate of interest to be charged to the customer. As the score goes up, it would reflect a lower risk for the customer hence the formula would be, higher the score, lower would be the rate of interest and lower the score, higher the risk profile hence, higher the rate of
interest.
Tenure matrix – risk-based loan tenure
The loan tenure metrics work similar to the rate of interest matrix. To decide the loan tenure, there are two views.
- One school of thought says that if the customer’s risk profile
is higher, which means the customer is prone to higher risks the loan tenure should be lower. The idea behind this thought is that you should be able to recover the loan as soon as possible and should not take the risk of longer loan tenure. - The Other thought is that if the customer risk profile is on the
higher side, which means the profile is not so strong, then the loan tenure should be kept higher so that the repayment is
done over a period of time and keeping his monthly liability
that is equated monthly installments at the lower side
which would not hold very high obligation on the borrower
and the borrower shall be able to pay the loan quickly based
on his cash flow. The lender chooses the method based on its internal policy and philosophy.
Here is an illustration of one matrix given for the loan tenure to be
given to the customer considering the first view wherein the loan tenure is higher for the customer who has a higher credit score.
Here, is an illustration of the matrix given for the loan tenure to be given to the customer considering the second view wherein the loan tenure is higher for the customer who has a lower credit score.
Amount matrix loan amount basis
- Multiples of ITR,
- Credit summation for 12 months,
- Average Bank Balance in last 12 months (ABB)
- Turnover as declared by the applicant
- Turnover as assessed by the credit manager
- Use of Industry margin
Loan to Value of property wherever applicable.
MCA data fetching and analysis in the case of Companies and LLP
firms to be done. As explained earlier, this can be done through API integration. Credit managers should have a separate app, or, within the app, the facility to take pictures, record audio, record video, write comments, edit answers to prefixed questions and so on. Based on this, the score
shall be generated. All this data pictures, recordings and more
should automatically go into the loan software.
Disbursement
As you would have seen in the earlier part of this section, a loan is thoroughly checked by the credit manager using various tools and then either rejected or approved as per the company’s credit policy.
- Once the credit manager approves the credit facility for
the loan, the next step is the execution of credit facility
documents or loan agreements. Depending on the nature of
the credit facility, there can be various documents that need
to be signed by the borrower. The initial information given
by the applicant, along with his consent forms, is part of the
credit facility application. The borrower can sign or execute
these documents using an ink pen. However, various tools allow digital signatures, also known as e-sign, to execute loan agreements in the digital world. These digital signatures are
approved in most countries as legally accepted signatures in
the court of law. - After that, it moves to the operations department or the
disbursement department to re-check the loan documents
and approve it further for disbursement of the loan amount in the customer’s account. The operations department generally has a checklist to ensure all documents are correctly executed. For small-ticket personal loans where the loan Agreement is digitally signed by the customer, such a checklist may not be required. However, a checklist is necessary for a large ticket or a secured loan backed by collateral. As explained earlier, there can be various kinds of loan products. Hence, the checklist may also be different for each product.
As a modern-age fintech entity in the learning space, the Tech platform must have the facility to service multiple lenders on this platform. The tech platform should have auto checking of the checklist and some other features, as mentioned in the following table. A sample checklist is given as follows for better understanding, although it can
be customized based on each fintech entity’s product and internal processes.
The tech platform should be able to generate an entire credit facility documents, loan kits, or loan agreements of multiple lenders if the platform uses numerous lenders.
- Loan agreement auto generation should take care of the points below.
- Application duly filled in with all the required information as provided by the applicant.
- Sanction letter along with terms and conditions as set by the lender.
- Loan facility documents as per product there may be many products like personal loan, unsecured loan, secured loan, and so on.
- Guarantee (PG) agreement wherein there may be more
than one guarantor hence this has to be dynamic to generate the guarantees documents based on the number of guarantors in a loan facility.
2. Digital signatures by both parties lender and borrower
should be available. This may be built by the Fintech entity,
or an integration with a third party product may be required. There are various methods to get the e-sign or digital signatures by the parties.
- Aadhar (UIDAI) based signatures — Where the person gets a One Time Password (OTP) on his mobile number linked with his Aadhar number. On giving the OTP, the document is digitally signed.
- Date and time stamp with IP address — For small ticket
loans, some Fintech companies use a practice of getting
their term and conditions accepted by the borrower
and capturing the date, time, and location along with the IP address. The same is used as a stamp or sign on the documents as an e-sign. - Digital signature — There are tools where the signatory
person gets a system-generated OTP and a facility to draw their signature on the smartphone or computer screen. In some cases, they also provide a few designs of signatures to be used by the person. These tools
capture the date, time, location, and in some cases, the photo to keep an audit trail of the document’s signature flow. - DSC — A traditional but secured digital signature method companies use to file and sign government authorities and regulators documents. This is done using hardware (drive) to sign the documents digitally.
- Security creation on property documents and auto fetching of
the following reports from the vendors can be done through the system itself though applicable only to loans secured by collateral or properties. - Legal report
- Search report
- Valuation
- Vetting
Loan Servicing and Monitoring
- Independent database
The entire database must be kept independently in various formats in different tables. All such tables must be interlinked with auto-refresh and auto-update features.
The mobile app subject to consent from the customer, should have the ability to read the text messages and analyze them, especially for financial transaction alerts like applications for a new
loan, banking transactions, cheque bounces new app downloads mainly related to loans, location, contact list, and call tracking to know the nature of calls and so on. Operations are more about monitoring loans, including foreclosure,
and so on. There is a need to monitor borrowers (location, messages, significant changes, new loan applications and so on for their activities send notifications and so on.
Customer service
Under this, the customer needs to be provided various facilities with
easy-to-use experience.
- Log in and find out about all kinds of status updates about
their account - Information through website, App - notifications, text messages and auto WhatsApp (messenger), email, and so on.
- Query resolution through website/ App – a chatbot.
- Chatbot for FAQ – regular queries.
- Chatbot for marketing/sales/ lead generation.
- Chatbot for customer services for existing customers.
Facility to manage top-up loans
Most lending institutions offer a new loan facility during the currency of an existing facility based on the repayment track record, called Top Up. This means offering additional loan facilities in addition to the existing ones. In my understanding, this is not a commonly used feature created by most Fintech entities. It would be good if a machine learning tool could be made and, based on some rules, an auto offer could be generated for a new loan.
Facility for multiple loans to the same borrower
Many fintech companies, while building the tech platform, create a restriction that the same email, mobile number, PAN and Aadhar
cannot be used. When a customer can be provided with various
kinds of loans and products, it should be the other way around. The system must allow multiple facilities or developments to the same customer using the same KYC data and other available information, including the existing track record.
Other charges, overdue interest, penalties
In case of default or delay in payment by the borrower, various
charges are levied by the lenders. These charges should be auto
calculated based on the repayment data to avoid manual calculations.
Auto generation of ACH mandate form (e-NACH)
The feature can be either built by Fintech or provided by integration with third-party software.
Auto generation of insurance policy
Most lending institutions tie up with insurance companies to insure the borrower and the property in case of collateral based loans. The insurance cover note or application can be pre-filled and auto-sent to the insurance company for the borrower’s insurance.
Foreclosure charges and the entire foreclosure process
There are a lot of times a customer comes to close his running loan
before the maturity date, called a foreclosure. Most companies levy a fee or charges in case of foreclosure. Generally, there is a slab based structure in case of a foreclosure. An illustration of such payments for a 36-month loan can be.
- Fee of 4% if the loan is closed within 12 months.
- Fee of 2% if the loan is closed after 12 months but within 24
months. - Fee of NIL if the loan is closed after 24 months but within 36
months.
The tech platform should be able to calculate these charges
automatically with a facility to edit, reduce or modify these charges if needed.
Collection or Recovery
- Reminders for EMI due
Before EMI is sent to all borrowers, they are reminded of the due date on which they should keep sufficient funds in their bank account. Nowadays, EMIs are presented electronically. The funds should be kept in the account on the previous day for quick EMI redressal. Secondly, as per new rules in India, the debit instructions or auto NACH presentation can also happen on a holiday hence the EMI
may also hit the bank account on a Sunday or public holiday. This must be communicated to the borrowers clearly to keep funds in their bank accounts well in advance. - Messages for bounces
When the cheques or NACH or e-NACH are presented and not cleared for whatsoever reason, the same should be automatically informed to the defaulting borrowers. - Messages for representation of EMI
Most lenders generally represent the bounced EMIs after 3 or 5 days. In such a case, the exact date on which representation shall be done
should also be communicated to the borrowers giving them another chance to clear the dues. - Receipt for EMI received
If the dues are not auto collected by NACH or cheque presentation and a collection agent collects the same, the receipt should be auto
generated and sent to the customers. This is risky as the collection agent may or may not issue the receipt for the amount recovered from the customers. A centralized collection monitoring and receipt issuance system helps reduce frauds. - Payment integration with online payment gateway
Other than the regular recovery by way of e-NACH, many times, the lenders also need to collect the dues through alternative mechanisms such as Paytm/ Mswipe/RazorPay and so on. The tech platform being built must integrate with the maximum number of possible
platforms so that it’s easier for borrowers to make payments using payment wallets, UPI and so on. - Auto credit to account in operations and accounts
The last and most crucial feature is built to integrate Loan Management System with the accounting system, wherein the collections are not only entered into the LMS but also the accounting system. All these messages may be communicated in multiple languages mainly in English and one in a local or regional language. Similarly, messages should be shared by numerous means of communication
like text, messenger and email.
There are specific guidelines from the Reserve Bank of India
related to the recovery process. The Fintech must take care of them and build them into the system. The Fintech must also record all the calls to ensure no foul or unwarranted language is used by the recovery agent. They should not harass borrowers by posting their
names, pictures, addresses and other details on social media. It should not capture or store sensitive data, information, contact list, photos, call history, SMS data and so on of the borrower without the specific and explicit permission of the borrower.
Legal
While most fintech companies focus on customer acquisition and customer servicing, one of the important aspects to focus on in lending institutions is the efficient handling of legal matters. Generally, legal issues are complex and it becomes challenging to concentrate on and track every legal case manually. A separate database and workflow of legal matters must be built for the faster resolution of issues and a better reporting structure to the management.
- Empanelment of lawyers
- Allocation of cases
- Tracking of legal cases
- Loan recall notice (LRN)
- Arbitration proceedings
- Criminal cases under section 138
- Withdrawal of cases
Accounting
While the accounting software is a separate and independent system, the fintech platform needs to be integrated with the accounting
system to avoid duplication of work and ensure the correctness of data. This makes all the information available to the customer on the loan management system as reflected in the accounting system or software.
- Integration of accounting software with Fintech/ loan
software. - Auto debit/ credit to borrower account based on LAN or any
other linked no mobile and so on. - Interest calculation as per the laid down policy and process.
- Additional charges, overdue interest, penalties.
- Foreclosure charges and the entire foreclosure process.
- MIS generation
- As mentioned previously in operations.
- As per accounting process/ policies/ RBI guidelines.
Conclusion
The section has given an overview of building the technology
platform for a lending institution. This would help create the key
parameters and features in the platform. Needless to say, this is not a very exhaustive list of all the features to be built, but this will help create broad parameters that would be different for each product and per the organization’s vision.
In the next section, we will learn about building a scalable technical structure to develop a faster, more efficient and more cost effective tech stack.
