By Abhay Bhutada, Managing Director, Poonawalla Fincorp
Until 10 years ago, taking a loan was a cumbersome process. Borrowers had no option but to approach banks for credit, getting caught up in the lengthy paperwork and trying to prove their creditworthiness. Credit underwriting, which mostly relied on human judgement, also took time and could take weeks or even months before loans were actually sanctioned. This changed with the advent of NBFCs!
Armed with latest technologies, NBFCs are revolutionising the lending space by building innovative products and transforming financial operations. In a country like India, where banking services struggle to reach masses, NBFCs have emerged as game-changers by fulfilling last mile access to credit. Though banks still drive economic activity today, NBFCs ensure maximum utilisation of credit.
NBFC have expanded the loan customer base, reached underserved areas, embraced overlooked customers, and cater to once-deemed impossible use cases. However, their biggest contribution is leveraging technology to build new-age financial products and services. Let’s explore how NBFCs use technology to pave the way for a financially inclusive future.
Technology’s Role in the NBFC Growth Story
The growth of NBFCs has been significantly influenced by technology. These organisations are harnessing new developments in the tech field to streamline operations, drive cost efficiencies, and enhance the overall customer experience. Digital tools like eKYC, eSign, eNACH, etc. are not only making lending more convenient but also accessible to a wider range of mobile users. With technology NBFCs have achieved faster loan approval processes, implemented real-time credit scoring systems, and facilitated seamless online transactions.
The Advent of Artificial Intelligence and Machine Learning
Risk assessment is vital for lending decisions and significantly impacts NBFCs’ business metrics. By leveraging Artificial Intelligence (AI) and Machine Learning (ML) models, NBFCs can streamline credit evaluations using diverse alternative data sources like tax invoices, device data, and transactions. This empowers them to assess creditworthiness, gain insights into delinquency risk, and proactively manage at-risk accounts.
Research shows that employing alternative data and ML algorithms resulted in a 27% increase in approved applications and a 16% reduction in average APRs. This is especially crucial in complex B2B contexts influenced by factors such as shareholder control and industry risk.
Additionally, implementing AI-driven pre-approval processes optimises loan authorization rates and minimises decline scenarios. AI-driven tools enable personalised loan offerings by segmenting customers based on their repayment capability. On the other hand, ML aids in identifying potential defaulters during collections, allowing efficient resource allocation and tailored strategies based on default risk.
Leveraging Technology to Build New-Age Financial Products
By embracing technology, NBFCs are on their way to automating critical business processes, including loan approvals and disbursements, resulting in saved time and effort. With effective analysis of accurate customer data, various customer demands and financial pain points can be identified in the market. For example, sections like loans for pre-owned cars, education loans, and special loans for MSMEs have been previously identified and incorporated as attractive lending options. Going forward, a new attractive category of mini or micro loans is cultivating big interests and vast use case applications for NBFCs.
Effective decoding and analysis of these demands through technology aids NBFCs in developing new loan categories and products with quick disbursal processes. Hence, technology enables NBFCs to keep tabs on the shifting market trends and consumer behaviours to determine new scopes of lending.
Future of Technology in NBFCs
The future of technology in NBFCs is full of potential. Personalised services, real-time solutions, and automation through AI, ML, and blockchain are bound to make a big impact in the lending space.
Technology-based products and services further empower NBFCs to provide personalised services that cater to the unique needs of individual customers, fostering heightened satisfaction and cultivating long-term loyalty. Moreover, technology will also act as a gateway for NBFCs, propelling them beyond traditional boundaries and allowing them to penetrate untapped markets and serve customers in remote areas. This expansion will broaden their influence and bolster their ability to make a meaningful impact.