Our Blog
Understanding credit underwriting and how its assessment has changed in the age of automation?
Date : 2021-09-22
Banks and other lending institutions will often use credit underwriting to assess customer’s financial capability before approving or rejecting them for a loan or credit card. Although the practice itself isn’t too difficult to understand, there are many elements of credit underwriting that can be puzzling and sometimes even intimidating if one doesn’t know what to expect.
This article will give you some helpful insight into this practice and how it’s evolving in the age of automation.
What is credit underwriting or credit analysis?
Credit underwriting is simply a process of taking personal, financial, and/or business information, analyzing it for what it says about one’s ability to repay loans or other debts, and then accepting or rejecting that person for that purpose.
For lenders, evaluating an applicant’s creditworthiness is one of their most important and at the same challenging tasks. Before making a loan decision, they examine each borrower’s financial documents—typically, tax returns and financial statements—looking for information that will indicate whether or not they are likely to repay their debt. This process done in a systematic way is called credit analysis or credit underwriting. Some loans only require an in-depth review of basic data—such as income and current debt—while others require in-depth analysis of several years of data.
Banks and other financial institutions utilize credit reports generated through the manual examination of the customer’s financial data or hire an agency expert in underwriting or use an automated system to underwrite the loan processing.
![](\"https://lh4.googleusercontent.com/OefqCoLo_R2S5GlJiD7H4Gx-T9XpaKP4o3erX5AgKpwM-tEeaHg0fZnpmYJsjUnKn8R7Nb-ZpMz_sv1jlVVKm5osaVksLO_RBquHvI2mTi4QU10Cczof7Zuh4oAJf3wN0BCp1mbQ=s0\")
Role of bank statement analysis in credit underwriting
A good way to get a feel for a person’s financial situation is by doing the bank statement analysis and that is how credit underwriting starts.
For many consumers, their bank statement is a detailed accounting of their spending habits. A review of these statements can give us clues as to how financially responsible they are and whether or not they are trustworthy with money.
If we see regular but unexplained withdrawals or deposits, it could be indicative of someone who would struggle to pay back loans on time.
If we see frequent ATM withdrawals it may be an indication that they live paycheck-to-paycheck and likely cannot maintain large monthly payments like those on a mortgage.
These details might not seem important at first, but if they appear throughout multiple statements then it’s likely something that should come up in discussions during mortgage underwriting discussions and that is how the bank statement comes into consideration during the underwriting process.
Problems in manual Credit underwriting process
The goal of a creditor is simple – lend money and recover it. For a lender, only one thing matters – risk. Whenever a lender extends a loan, he takes into account two factors: the probability that the customer will default on his obligations and the cost of covering that loss if it happens. This applies to both consumer lending (mortgages, auto loans, credit cards) and commercial lending (commercial real estate loans, corporate business lending). The way creditors assess their borrowers varies across different financial products but they all work in similar ways. Like any other business operations risk is at its lowest when operating in areas where there are many successful players who have proven demand for a particular product or service.
As we know now, creditworthiness is decided by crunching data based on a number of factors including your employment history, current income level, savings levels and more to create a picture of how likely someone is able to repay a loan while lending at minimal risk. That is where the real problem occurs, crunching financial data, typically it\'s an examination of an exhaustive list of data and statements and doing it manually becomes cumbersome and proves to be time taking and costly. Therefore financial institutions and credit agency experts have become reliant upon technology and let automation do the work.
Read the article further to know about the use of automation in doing the most challenging work of credit underwriting.
Automating bank statement analysis and thereby credit underwriting
Credit scores can be generated through an automated system (CART link in it) that uses algorithms to give each applicant a score. These systems can then be used for decisions, such as loans, credit card approvals or mortgage pre-approval. Financial data is particularly attractive for companies because it’s so detailed and rich with information, including both purchases and personal habits.
Bringing Automation in Financial assessment during the credit underwriting of a loan which otherwise is a manual process increases the turn-around--time (TAT)of Loan disbursal and is also prone to in-accurate assessment. With the help of Advanced Analytics combined with the power of Artificial intelligence (AI) and Machine learning (ML) to solve this problem hence can support large institutions with minimal operational support. Following a roadmap philosophy, including other documents as well, it develops a complete robust underwriting process.
“How Novel Patterns is leveraging Advanced AI & ML techniques to pro-actively save tons of money for Banks and reduce TAT for Loan disbursals’’
Date : 2021-09-22
The Indian Fintech market is currently valued at $31 Bn and is expected to grow to $84 Bn by 2025, at a CAGR of 22%. The Fintech transaction value size is set to grow from US$ 66 Bn in 2019 to US$ 138 Bn in 2023, at a CAGR of 20%.
According to the RBI, bank credit and deposits stood at Rs. 108 trillion (US$ 1.5 trillion) and Rs. 149.6 trillion (US$ 2.1 trillion), respectively, as of March 12, 2021. Extending credit and Interest income has always been one of the core revenue streams for Banks, NBFCs and other Financial Institutions.
There was a time when a home loan approval with time to cash would easily take 25–40 days. With the current advancement in technology, the overall TAT has come down drastically but is still manual intensive and involves huge operations cost. “According to Livemint article dated 27 May 2021, the average lag between the date of occurrence of frauds and their detection by banks and Financial Institutions was 23 months during 2020–21. “
![\"\"](\"https://miro.medium.com/max/60/1*mUtUhWIx_xs0Y8d87MYXLA.png?q=20\")
![\"\"](\"https://miro.medium.com/max/250/1*mUtUhWIx_xs0Y8d87MYXLA.png\")
Realizing the gap where current industry players have solved the business problem with rudimentary tech solutions but not made big investments in underlying tech upgrade to leverage the latest stack available, Amit Trivedi and Abhishek Singh commenced operations in 2017 to leverage their combined experience of almost 35+ yrs in data science area to leverage Advance AI & ML algorithms along with Document ontology algorithms to build a use case of Bank Statement Analysis for automation of credit underwriting process of a loan lifecycle.
Novel Patterns then ventured out with a roadmap to automate complete underwriting by covering ITR and GST analysis and other income documents.
The core reasons why Novel Patterns was able to replace existing industry leaders in this space of Bank Statement Analysis is because of superior service quality, lesser rejection rates with documents, wider coverage in terms of banks and financial institutions, very robust Fraud detection of and aggressive pricing.
Making even an Rs.1000 loan profitable is the mission statement the company and the founders started off with. During the Pandemic onset, Novel Patterns also realized the need for platforms that could help people avoid physical travel and perform onboarding and client servicing processes remotely. Hence, they set in motion the development of their video-based platform MyConCall which can be used for Video KYC, Personal Discussions, vendor empanelment and document sharing. This helped bank personnel to cover the last mile without any physical travel with all artifacts including video interaction recording, KYC documents capture, business validation rules, questionnaire responses and location stored in electronic streams and available from an audit perspective as well. The platform also helped in the overall initiative of complete digital and paperless processing of loans across all verticals.
Both the platforms for Novel Patterns have been designed from the ground up without the use of much external components as it also satiates the product enthusiasts in each of the firm’s team members. Currently heading the Sales & Marketing, Anish Kumar also comes up from a similar background of helping leading Banks across the globe streamline their asset and liability processes for almost 7+ yrs. Novel Patterns started out with its first customer in 2018 and has been on exponential revenue growth month on month since then.
Currently, they are serving 40+ Banks and Financials Institutions and adding value in their day-to-day processes. Almost Zero attrition rate in terms of employee retention and Customer retention, speaks volumes of the company culture and the processes being followed with every aligned person becoming part of the overall growth journey and getting the ultimate pride and gratification is looking at so many people using the platforms and able to add value through technology.
Novel Patterns acts as Strategic Partners and not just another vendor and are very open to working with leading Banks and NBFCs to configure solutions as per business requirements and not limit opportunities because of technology or platform constraints thus becoming the ideal technology partners.
In their effort to address and add value to the complete banking industry — Retail, corporate and Investment Banking, the products and the roadmap is aligned to leverage NLP and NLG tech stack for very advanced and user-friendly platforms supporting conglomerates in achieving their digital initiatives even faster and playing a major role in the exponential growth.
WHAT IS A.I AND HOW IT CAN TRANSFORM THE FINANCE SECTOR?
Date : 2021-09-28
“The last 10 years have been about building a world that is mobile-first however in the next 10 years, we will shift to a world that is AI-first.” quoted by CEO of Google.
BRIEF ABOUT AI:
The capabilities of AI become well-known after AlphaGo Zero, an AI based computer program became mastered in Chinese famous board Game Go in 3 days after defeating other computer models which already beat best players of the world.
![\"AI](\"https://novelpatterns.com/wp-content/uploads/2020/05/blog1.png?x39657\")
With the advent of Artificial Intelligence, a machine is made to learn and self-evolve from its current environment and adjust to become future ready. AI has seen tremendous acceptance & growth because of exponential rise in the digital data and limitation in the computing power of existing systems. At present, AI is bringing a considerable change in different industries including and not limited to Healthcare Services, Education Sector, Financial Services, Manufacturing and more.
Currently in Financial services, we are sitting on huge amount of data and a lot of time, people are clueless to understand the value of the insights that can be churned out and help one getting that competitive edge over others. AI in banking services for example is transform the industry by automating a lot of manual and repetitive processes. One such in process example is the Financial Assessment Automation that happens during the underwriting process of loans where accurate analysis is of more importance and helps reduce TAT and reduce NPAs for the banks because of accurate analysis of credit worthiness of borrower.
PROBLEMS IN FINANCE AND ACCOUNTING:
- Dealing with huge amount transactions due to millions of data points
- Lots of time spend in manual & repetitive work
- Accuracy in keeping records of each and every transaction
- Lots of mundane transactional activities
- Lack of quick actionable insights
BENEFITS OF AI IN FINANCE AND ACCOUNTING:
- AI in Finance in banking services can help professionals by giving them more time to focus on their primary work and counseling their clients rather than spending time on transactional activities
- Increase in productivity and high quality of results with high transparency
- Reduce work load of finance team professionals
- More accurate financial statement analysis
- Can efficiently complete tasks like extraction of data and structuring of the information
- AI in accounting saves time with the reduction of manual work
- Automate procedures of accounting
![\"AI](\"https://novelpatterns.com/wp-content/uploads/2020/05/Blog2-300x200.png?x39657\")
FUNCTIONS OF AI IN FINANCE AND ACCOUNTING:
- Can replicate human tasks:
AI can do the human tasks which take a lot of time like data entry & data reconciliation and also reduce errors. Bots are the new thing which are already prominent in customer service as well with chatbots and Voice bots. - Reduce frauds:
Each and every transaction can be tracked more efficiently and any fraud activity is being identified more accurately. With AI in Finance, a professional can easily analyse different relationships and find out suspicious transactions and report it in a visual manner. - Invoices Processing work:
Downloading invoices after going through emails and then manual extraction of data takes lot of time. AI can automate the whole process of invoice processing and improve efficiency & productivity with zero percentage chances of error. This does also compliment AI in accounting to streamline and automate the complete process. CART, an AI driven software, saves time and improve productivity by 100% accurate extraction of data and invoice processing. - On-boarding of suppliers and procurement processes:
AI can help in automated verification of tax details and in credit assessment so as to help in selecting the correct supplier. AI can also help in data segregation and categorization for effective vendor management. - During Audit Processes:
Helps in the assessment of risk and tracking each & every record of transactions. With AI in finance, one can automate tasks (like data collection, following rules) and also find errors when deviating from pre-defined rules. AI saves time by helping in analyzing digital files with highest accuracy and improved analyzing capabilities. - Reconciliation of data:
Reconciliation of data is of prime importance in places where highly confidential and sensitive data is being stored and are related to high value of financial transactions. For example, to maintain accurate accounting records or to generate required ABOR or IBOR reports for an asset management firm, reconciliation of data is very important. Genesis , a new age Investment Management platform, helps in data reconciliation and provide up to date reporting service according to requirements. - During Company expense management:
Using AI, advance rules with exception management can be created in expense management which helps to keep the overall costs of an organisation in check. - Follow-up process automation:
Tracking of outstanding invoices can be done and follow-up process can be automated with the help of AI driven Chat & Voice bot. Chatbots have also proven to be successful in handling customer service escalation or service management. - Assessment of Risk:
AI can analyze vast amount of data and also make the processes automated to get the risk assessment done more efficiently. A very relevant use case is the risk assessment that happens during the underwriting process of a loan application which needs to compliment with the repayment capacity if the borrower in order to propose the correct sanction amount and condition for approval. An even more advance use case is to identify the probability of default of a borrower by advance AI and ML based models. - In Trading field:
Prediction plays an important role in trading and I can do it by analysing the vast amount of past data. The prediction improves with time since AI with a machine learning combination self evolves from its experience and results in even more accurate results. According to a person’s personality (High-risk taker or low-risk taker), AI system can suggest when and what to buy or sell or to hold in an overall proposition to have a system recommended robotics based portfolio. - Personal Expense Management:
AI driven system can help individuals to understand the spending behavior and help them to better plan for the future which can be aligned with a saving Goal as well.
![\"AI](\"https://novelpatterns.com/wp-content/uploads/2020/05/Blog3-300x188.png?x39657\")
AI in finance and accounting is still in the embryonic stages. However, we can say that AI has already started transforming Finance sector in a big way and the companies who will embrace the new AI age will flourish in coming times. Novel Patterns is a product driven organization enthusiastic to leverage the AI and Machine learning techniques to solve real life problems and build solid use cases. One such product is Credit Assessment and Robotics Transformation (C.A.R.T) which helps in the automation of financial assessment happening during the underwriting process of a loan application hence improving efficiency and reduce turn-around time leaving no room for the process being prone to errors. Know more.
As AI revolution is fast overtaking the traditional and tedious methods, we still cannot circumvent the human intelligence which will be required to supervise the technological marvels efficiently. The success mantra will be to pair AI machine and people together to get a more efficient and better future.
INTUITIONS VS DATA DRIVEN DECISIONS IN CREDIT UNDERWRITING
Date : 2021-10-01
SPEAKING TO A NATIONAL CREDIT HEAD
OF A TIER 1 BANK IN INDIA
Me: Sir what data touchpoints are critical for your underwriting process?
Banker: I can look into the eye of the borrower and take a call if they will repay.
Me (a little astonished but not showing on the face): Sir it is difficult for us to tell our systems or configure them to do that.
But later I gave it a deeper thought and understood that one’s emotions and Gut feel also play an important role in the credit underwriting process of a loan.
BUT THE REAL QUESTION IS HOW MUCH?
One of the factors also contributing to making this way of underwriting in developing countries popular is the lack of data availability for unorganized self-employed sectors. Imagine a roadside tea shop vendor earning almost INR 50,000 in a month but the Cash flows are a mixture of Cash, credit, online wallets and even sometimes barter. With inadequate data to make a call, looking into the eye and with a historically low NPA to tap your back does not seem to be such a bad option after all.
Emotions and Intuitions also play a very important role but the important question is what is that balance that keeps the decisions always on point.
![\"Novel](\"https://novelpatterns.com/wp-content/uploads/2021/07/illustration-audit-report-verification-1-910x350.jpg?x39657\" "\\"Audit")
THE FLIP SIDE OF EVERYTHING I HAVE SAID TILL NOW IS: CAN YOU TRUST THE DATA 100% ??
There is no denying the fact that 1.6 billion adults around the globe are under-banked – no checking, savings or mobile money provider accounts, no access to financial products like insurance, loans or mortgages, no protection for their money from theft or loss. (According to World Bank -2021). Financial Inclusion is not only pulling down the nation’s economic growth but also affects people’s quality of life and makes it difficult to safeguard them of any illness or job loss. Also synonymous to say that it becomes all the more difficult for them to escape poverty. True financial inclusion would commence by bringing people out of poverty.
After this brief premise, Coming back to the underwriting methods where the Banker is still looking at me with conviction as if I am too naïve to understand this and telling me more-
Banker: Your Gut feel and intentions are far more important than any piece of paper proving otherwise.
Me: Sir, how about applying the same to a Salaried segment than with appropriate data to dint-of the decision or the so-called (used deliberately) STP processes being designed in the new age lending processes to cut down TAT and enhance customer experience.
Banker (with even more credo but a little discomfort in his eyes this time): Good if that working for some. Not for me and my portfolio.
Is ignorance and disbelief and denying to change with the pace of technology also a major impediment to digitalize the processes. What good is technology if it is not cost-effective and cannot solve a potent problem? At the same time, paucity of data for unorganized sectors still remains a snag and Banks are forced to either create new accounts, build a credit history and then lend prospects or use physical agencies who look over Non-professionals in their peak hours of working and make a judgement.
Processes such as Video based KYC, Income assessment through Bank Statement Analysis, Bureau Pull and closure through eNACH& eSignatures have helped create processes without any manual intervention but is mostly not much admired for un-organized sectors because of the people not being that tech-savvy and of course of the problem of data that we have been pondering over. Bringing in Vernacular support helps to a little extent but does not solve the problem completely.
Digging a little deeper into the Gut based Lending, it’s not completely about Intuitions. It is considered that if the customer is existing and has a good repayment structure. One does speak to the neighbours and references, look at cash flows over a brief time period and then extrapolated, discussions with suppliers and buyers and much more.
WELL, THAT’S DATA TOO !!
More subjective in many terms. Exploring Alternate Data seemed like a legit next step in our efforts to solve this problem. Online wallets, Smartphone usage data, SMSs, behavioral aspects on Smartphone, social profiles and other such channels have helped develop some credible information but is still not reaching the bottom of the pyramid.
In conclusion, one can either solve the problem by finding alternate data sets for unbanked sectors or uplifting the segment with financial inclusion and adequate technology infrastructure.
Closing comments from the Banker: I can show you people with absolutely no papers or information but have been paying back on time from last 3 years.
Me: I believe you Sir!!
NOVEL PATTERNS – UTILIZING INNOVATIONS TO PROVIDE THE SIMPLIFIED SOLUTION
![\"Novel](\"https://novelpatterns.com/wp-content/uploads/2021/07/NP_LinkedIn-Cover-1200x300.png?x39657\" "\\"Novel")
What is KYC and Video KYC? It’s permissibility, safety and benefits.
Date : 2021-11-17
The term Know Your Customer (KYC) has become quite popular lately, especially in the wake of all the regulations by governments to combat illegal financial activities. However, it isn’t the only term that you need to be familiar with if you want to stay compliant while conducting transactions or storing data on behalf of your customers. KYC was actually preceded by an older term known as Client Onboarding, which refers to the process of completing customer identification forms before conducting business with them.
What is KYC? Why it is important?
Know Your Customer (KYC) is an identification process that is required when opening a bank account. A copy of your proof of identity, proof of address, proof of source of funds must be provided before you open a bank account. Banks are required by law to collect information about you, verify it, and maintain records even after the account is closed. This helps prevent money laundering.
Reserve bank of India (RBI) has mandated all Indian financial institutions, banks, and other financial organizations to verify both the identity and address of all customers who are to carry out any kind of financial transactions with them.
What is Video KYC?
A method that uses video conferencing solutions in order to confirm an individual’s identity with financial institutions. The process works by allowing businesses to confirm a client’s identity through video calls, which are recorded for reference at a later date. This allows businesses to keep their client data secure whilst also creating accessible records of conversations between themselves and their clients. While it has been around for a number of years, we have seen an increase in its usage during 2017 as more individuals became aware of its security benefits.
Is Video KYC full KYC?
In January 2020, RBI had allowed a video-based customer identification process for individual customer onboarding by regulated entities of RBI i.e customer onboarding by banks, so Yes, video KYC is full KYC now.
“Taking forward the initiatives of the Reserve Bank for enhancing customer convenience, it has been decided to rationalise certain components of the extant KYC norms. These include extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers such as proprietorship firms, authorised signatories and beneficial owners of legal entities and for periodic updation of KYC,” said RBI Governor Mr Das.
Is Video KYC safe?
Yes, video KYC does not store any sensitive financial information. It only stores information related to know your customer (KYC) norms. The video obtained through mobile-based interaction reflects how a person looks like, so no two people can be tagged on same mobile number even if their Aadhaar cards are different. If someone tries to use another person’s mobile number then biometric details will get rejected by Aadhaar system automatically after saving personal data of real user in its database. This feature makes video based KYC more secure than eKYC done through OTP sent on phone number linked with bank account/Aadhaar card for authenticating user’s identity while undertaking financial transactions or carrying out applications like opening new bank accounts, getting SIM card or acquiring loans etc.
Benefits of Video KYC
Video KYC is a more reliable and efficient way to verify the identities of clients or employees compared to traditional paper-based procedures. The Video KYC process will increase customer satisfaction as it replaces tedious paperwork with instant verification. Also, data stored on videos are stored forever and can be used as proof of compliance with Know Your Customer (KYC) policies in case of any investigations. Moreover, financial institutions using video verification have higher ROI compared to those using less secure methods or going without any form of verification at all due to legal requirements.
Earlier, to open a bank account, an individual had to fill up multiple forms at different banks as well as submit physical documents like ID card, address proof and PAN card. This process of collecting all required information was known as ‘Know Your Customer’ or ‘KYC’. However, with time and technological advances, we have introduced video KYC which has made things easier for customers. The term ‘video KYC’ refers to digital identity verification through live-streaming of videos on mobile phones or tablets for purposes such as opening a bank account or obtaining a SIM card.
The term Know Your Customer (KYC) has become quite popular lately, especially in the wake of all the regulations by governments to combat illegal financial activities. However, it isn’t the only term that you need to be familiar with if you want to stay compliant while conducting transactions or storing data on behalf of your customers. KYC was actually preceded by an older term known as Client Onboarding, which refers to the process of completing customer identification forms before conducting business with them.
What is KYC? Why it is important?
Know Your Customer (KYC) is an identification process that is required when opening a bank account. A copy of your proof of identity, proof of address, proof of source of funds must be provided before you open a bank account. Banks are required by law to collect information about you, verify it, and maintain records even after the account is closed. This helps prevent money laundering.
Reserve bank of India (RBI) has mandated all Indian financial institutions, banks, and other financial organizations to verify both the identity and address of all customers who are to carry out any kind of financial transactions with them.
What is Video KYC?
A method that uses video conferencing solutions in order to confirm an individual’s identity with financial institutions. The process works by allowing businesses to confirm a client’s identity through video calls, which are recorded for reference at a later date. This allows businesses to keep their client data secure whilst also creating accessible records of conversations between themselves and their clients. While it has been around for a number of years, we have seen an increase in its usage during 2017 as more individuals became aware of its security benefits.
Is Video KYC full KYC?
In January 2020, RBI had allowed a video-based customer identification process for individual customer onboarding by regulated entities of RBI i.e customer onboarding by banks, so Yes, video KYC is full KYC now.
“Taking forward the initiatives of the Reserve Bank for enhancing customer convenience, it has been decided to rationalise certain components of the extant KYC norms. These include extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers such as proprietorship firms, authorised signatories and beneficial owners of legal entities and for periodic updation of KYC,” said RBI Governor Mr Das.
Is Video KYC safe?
Yes, video KYC does not store any sensitive financial information. It only stores information related to know your customer (KYC) norms. The video obtained through mobile-based interaction reflects how a person looks like, so no two people can be tagged on same mobile number even if their Aadhaar cards are different. If someone tries to use another person’s mobile number then biometric details will get rejected by Aadhaar system automatically after saving personal data of real user in its database. This feature makes video based KYC more secure than eKYC done through OTP sent on phone number linked with bank account/Aadhaar card for authenticating user’s identity while undertaking financial transactions or carrying out applications like opening new bank accounts, getting SIM card or acquiring loans etc.
Benefits of Video KYC
Video KYC is a more reliable and efficient way to verify the identities of clients or employees compared to traditional paper-based procedures. The Video KYC process will increase customer satisfaction as it replaces tedious paperwork with instant verification. Also, data stored on videos are stored forever and can be used as proof of compliance with Know Your Customer (KYC) policies in case of any investigations. Moreover, financial institutions using video verification have higher ROI compared to those using less secure methods or going without any form of verification at all due to legal requirements.
Earlier, to open a bank account, an individual had to fill up multiple forms at different banks as well as submit physical documents like ID card, address proof and PAN card. This process of collecting all required information was known as ‘Know Your Customer’ or ‘KYC’. However, with time and technological advances, we have introduced video KYC which has made things easier for customers. The term ‘video KYC’ refers to digital identity verification through live-streaming of videos on mobile phones or tablets for purposes such as opening a bank account or obtaining a SIM card.