Banks and NBFCs: Key Principles of Digital Lending

The year 2021 with COVID-19 and a series of crises accompanying it has brought revolution across all sectors to survive the devastating effects. And the financial sector is no exception. While video KYC and paperless loans have become top priorities of digitalization of the finance sector, at RNDPOINT we are sure they are only the tip of the iceberg. 

“Though there is no fast formula or rule of how to adapt the best digital lending practices, the willingness to change is already a big step forward,” says Peter Shubenok, CEO of RNDPOINT.

The pitfalls of traditional lending

First of all, it's necessary to define the disadvantages of the traditional lending process being practiced by Banks and NBFCs. The most common of them are: 

• long setup time

• cumbersome manual operations

• responsiveness

• lack of scalability for new financial products

• weak handling of Omni channels

Other than this, there are other things that digital lending can enhance in the landscape of lending in the financial sector.

Digital lending capabilities

The main focus of digital lending is predominantly on the lenders and borrowers and the way they go through the digital lifecycle of financial services and products. The process of digitization has led smaller banks and NBFCs to substantial improvement of customer experience. The application of digital lending noticeably enhanced the quality of decision-making reduced the turnaround time and saved costs of a single loan application and approval. On average, corporate credit applications for SMEs are processed within a few working days with digital lending instead of 3-4 weeks without. 

By increasing customer satisfaction, digital lending practices also increase current revenues and create new ones for smaller banks and NBFCs. 

Digital lending practices unmasked

Unfortunately, traditional lending is famous for its cumbersome paperwork and ambiguous practices both for B2B and B2C. Digital lending has been called for assistance to streamline and simplify the entire lending process by enhancing credit filing, automating application approval, and fund disbursement with little wait. 

The digital lending ecosystem built in a bank should improve: 

• Technology. The replacement of redundant human interaction – the pain points of old-school lending – with automated technology for document verification, assessing the borrowers’ creditworthiness, processing loans approval, and fund disbursement. 

• Digitalization. All banking processes should be available online on the paperless basis to shorten collateral review time. 

• Disbursement time. Automation of borrower assessment and loan decision-making significantly shortens the approval and disbursal stage – 30-45 minutes instead of 3-5 working days. 

• Data security. The data-driven digital lending process uses resilient and reliable encryption protocols to guard the borrower's personal and financial information. 

Principles of digital lending

There are certain key principles of digital lending for banks and NBFCs to follow for achieving effective digital maturity. 

1. Making organization digitally ready. Employees should be trained or familiar with the digital product used in a financial organization. "Digital thinking" should become a strategic goal and improvement of digital culture – the top priority.

2. Development of a digital lending strategy. Adapting to the latest technology and having a smart strategy is the only way for financial service providers to stay relevant in the lending industry now. This is achieved through using a CRM and a Structured Operational Process. 

The CRM you use should possess the following features:

• automation
• dashboard support
• analytical response

The digitized Operational Processes are listed below:

• credit application
• customer onboarding
• loan underwriting
• fund disburses
• customer relationship

3. Optimisation of digitization for different demographics/ client segments. While going fully or partially digital, it's necessary to keep in mind customer capabilities to be understandable and leave a positive impact on all categories of your customers across geographies.

Thus, usage of vernacular language for the platform provides accessibility by customers in rural and suburban areas. This is also another viable advantage that can give you an edge over your competitors.

4. Implementation of digital lending with a human touch. In the other words, this implementation is referred to as a tech and touch strategy. While getting into the digital lending ecosystem, it's necessary to always bear in mind the needs of each and every customer by providing a maximum personalized approach.

1. Customers in localities with poor connectivity and lower smartphone penetration might require more physical contact for loan or credit services.
2. Customer’s willingness and ability to use a digital product for lending services.
3. Size of the loan or credit availed by a customer is also to be considered. With a bigger sum, physical disbursement might be risky for which a customer’s digital savviness is important – usage of digital banking per se.

Even before setting up a digital lending system, a lender should be able to decide going digital with a mobile or desktop application based on customer attributes like age and usage.

5. Enabling partnerships in digital lending. It's quite a time needed for an organization to achieve digital maturity due to diverse factors. Partnering with Fintech startups to set up a digital lending ecosystem is advisable to shorten the distance. This partnership enables the execution of a specific digital function flawlessly and reduces the risk of failure of a digital product in the financial services sector.