Responsible Lending Guidelines- Threat or Opportunity for Banks?

What is 'responsible lending' all about?

In Australia, Australian Securities and Investments Commission (ASIC) has issued regulatory guidelines that makes it mandatory for the lenders to assess and make sure that a credit facility extended to a customer is 'not unsuitable' for them and customer is able to 'service' the credit extended by the lender.

ASIC defines responsible lending (RL) under its Regulatory Guideline 209 (RG 209) and sets up following steps that credit licensees will be required to take to be compliant {1}:

1.Make reasonable inquiries about the consumer's financial situation, and their requirements and objectives

2.Take reasonable steps to verify the consumer's financial situation

3.Make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is 'not unsuitable' for the consumer (based on the inquiries and information obtained in the first two steps).

What is the impact of responsible lending guidelines?

There is no doubt that this is a step in the right direction. The key intention of the regulators is to protect consumers from a load of debt that they are not in a position to service. This also reduces the risk of unethical marketing and selling practices. This will significantly enhance the asset quality of the Banks and reduce Nonperforming assets.

However, complying with these guidelines poses certain challenges for the lenders:

• As of now, Australian Banks are largely complying with RL guidelines (which include verification of income, employment, general living & entertainment expenses, collateral etc.) by adding more manpower to support additional volumes and checks. This has increased the cost and has impacted margins negatively
• Enhanced checks mean additional time for the customers to get a credit decision. While customers' expectations wrt turnaround times are at all-time high, RL guidelines have pushed the timelines for an 'Unconditional Yes' for a credit facility still further

Where does the opportunity lie for the Banks?

RL guidelines have kind of forced the Banks to take a re-look at their lending principles and operations. Till date, Banks in Australia are conducting significant part of verification checks manually. The verification checks are primarily based on verifying various documents provided by customers like salary slips, notice of assessment, PAYG statements, bank statements, contract of sale and so on. Since ages, these manual checks incur high cost and are time consuming. There is a significant opportunity to automate these checks to a large extent by leveraging cutting edge digital tools like OCR (Optical Character Recognition), RPA (Robotic Process Automation), Workflows etc.

Not only these manual checks can be automated, Banks and regulators can be more innovative & disruptive while assessing and verifying the serviceability of the customers. There are opportunities to integrate with various external and regulatory sources and get accurate and up to date information on customers' income and expenditure. If such checks can be implemented, there will be a significant improvement in customer experience and Banks' efficiency. Additionally, risk of fraudulent documents can also be brought down.

Is this opportunity limited to Australia?

I think the answer is a big 'NO'! Across the globe, Banks conduct checks on their customers to access their capability to repay the debt. Verification checks are largely manual by going through the physical documents. Are global Banks looking at this area as an opportunity as yet? What do you think?

References

{1} http://asic.gov.au/regulatory-resources/credit/responsible-lending/