Business means profits, every single effort here is made only to earn something from it. The banking business is no different.
When our local grocer supplies any material to us on credit, before supplying the materials he usually checks our credibility and our relations with him, even if the credit is for a day or a week. So, just imagine a loan amount of Rs 1 Crore for a term of 10 years or more. In that case, think about the level of credibility check at that time. One wants to rest assured about the repayment capability of the fund seeker. For this credit, appraisal procedure becomes more critical.
Every bank has their own Credit Appraisal methods but the majority of the process is same everywhere. So, Credit Appraisal means an investigation done by the bank before granting loan or advances to the fund seeker.
With this picture, several questions might be coming into your mind:
- Are the Corporates being provided an undue advantage by the Financial Institutions?
- Is major chunk of bank loans provided to Corporates?
- Are the funds being disbursed only on the outlook of the seeker or is there an in-depth analysis?
- Are the funds being blown away by the corporates in thin air without a proper track record?
- Is the bottom of the pyramid getting affected?
In past, the credit appraisal procedure was not very concrete. And corporates did enjoy the undue benefits from the banks. But the situation has changed now, the process has become very robust. Even farmers, small businesses, students, a person from the lower caste and with a disability can apply for a loan. All they need to do is just apply for the loan and pass the credibility check. Post disbursal monitoring is also done so that use of funds has to be for the purpose of the loan.
So, to give benefit for each class and sections of the society, appraisal system is there.
Process of Credit Appraisal System
This is a traditional way of credibility check:-
Step 2: Banks starts the process of verification and reconciliation of documents.
Step 3: Banks provides a rating to the applicant based on the above document scrutiny.
Step 4: Applicant agrees to the terms and conditions, then banks approve the loan.
Step 5: Loan amount gets deposited in the applicant’s account.
Step 6: Post sanction activities such as receiving stock statements, review of accounts.
Step 7: Recovery procedures are initiated in case of default in repayment.
Major Parameters in Credit Appraisal
“Innovations” in the process of Credit Appraisal:
Traditionally all the above parameters were considered for the appraisal process but now there’s is a demand for ALTERNATIVE DATA too.
- Tracing of digital footprints
You must be wondering how digital data can be traced?
Basically, it is from –
- Social Networking website like – Facebook, LinkedIn, and Twitter.
- E-Commerce Platforms – Flipkart, Amazon, Snapdeal, Myntra and Paytm.
- Mobile and Internet Usage.
- Geographic location – Google maps, Ola and Uber.
How we spend our time, the places we visit, where we hang out, may seem unrelated when it comes to the financial feasibility of a person, but in fact, throws up interesting behavioral and spending pattern. It gives a picture of the lifestyle of the borrower and helps predict the lifestyle of a person.
- Tracing the payments related to utilities and insurance premium
FICCI, BCG, and IBA in their paper on Digital Banking have stated that the introduction of periodic utility bill payments (electricity, telecom) and periodic insurance premium payment information into information bureau records would increase the bureau coverage from current 20 % to almost 70%.
FinTech – A new answer to credit appraisal system:
Financial tech companies right now are at the heart of some of the brightest innovations that have made them surprisingly successful. These technologies have changed the traditional method used by the Banks and NBFC’s may be it a CIBIL score or a credit rating.
Online lending platforms have come up with various unique credit appraisal processes based on factors such as:
- Amount of payment received
- Number of years
- Bank Statements
- VAT/ST Returns
As an online seller on the e-commerce platforms and also on like Myntra, Amazon, Flipkart, and Paytm etc. They basically trace the movement of cash flows in an account of a seller to calculate the amount of loan.
This is a unique way of credibility check which can be introduced into the banking system based on the Non-Traditional + Traditional data.
There are some companies operating outside India which is providing credit rating fully based on Alternative Data and Analytics i.e. using non-traditional data to provide credit scoring and verification. To opt this system of credit appraisal, P2P Lending Platform/ Financial institutions can tie up with these companies to extend their credit rating model to a new level.
Need of time:
Due to digitalization in the economy use of social networking sites, payment portal, e-commerce platforms, and P2P lending platform are day by day increasing. In that case use of a combo of both traditional + non-traditional data can be the best possible way to get the credit rating. There will always be risk involved in the lending business, but financial institutions are always looking to mitigate it. Startups do not have the ability to attract huge deposits and undertake vast amounts of loan advances, but having technology on their side levels the things.
Using technology of Fintech’s would be an added TADKA to this current appraisal system.