Revolutionizing credit underwriting process through technology

The economic uncertainty and volatility of the past few years have had a significant impact on the financial markets, especially the global lending industry. In response, financial institutions are increasingly relying on technology to adapt their lending strategies and mitigate risks in the face of changing market conditions. To safeguard against potential losses, these institutions are raising credit spreads on loan offerings and implementing proactive measures to protect against defaults.

The global economic uncertainty has only magnified the credit gap problem in the Indian lending market, underscoring the need for innovation in the industry.

Studies indicate that the share of credit scores for medium enterprises in Indian banks fell from 13.5% in 2007 to 4.3% in 2020. Most experts attribute this decline to the manual evaluation of creditworthiness. Biases in the credit underwriting process have historically affected decisions related to credit recipients, often restricting credit access to some disadvantaged demographics. These biases are evident in relation to protected characteristics like race, gender, and sexual orientation as well as those without an established credit history. Consequently, an increasing number of financial institutions are reevaluating their credit underwriting processes to promote greater credit availability and minimize the risk of defaults.

Advanced tech a panacea for credit underwriting 

The credit underwriting process has undergone a transformative shift with the integration of AI-driven underwriting systems. These systems leverage algorithms and analyze a wide range of traditional and non-traditional data to evaluate credit risk and make well- informed lending decisions. The application of AI not only expedites loan decision-making and detects fraud but also reduces the risk of human error, paving the way for a more inclusive, impartial, and accurate credit assessment.

By harnessing the power of AI and machine learning, financial institutions can assess borrowers' creditworthiness and reduce loan defaults. These advanced models provide lenders with more dynamic and comprehensive credit risk assessments, enhancing precision and bolstering detection of deceptive practices. 

Moreover, AI-powered credit underwriting holds significant promise for financial inclusivity and outreach. Through the swift analysis of vast and diverse data sources, such as utility payments and rental history, AI and ML models provide lenders with a holistic view of a borrower's creditworthiness. This approach opens avenues for individuals with limited credit history or no credit score to obtain credit. By incorporating diverse and representative data sources and ensuring regular monitoring and auditing, lenders can promote fairness and equity in credit decisions, fostering an inclusive lending landscape. 

Contrary to popular opinion, automated credit underwriting plays a pivotal role in expanding credit access to underserved populations. It empowers lenders to understand the credit needs of historically marginalized demographics better, which helps develop tailored credit products and services. Additionally, by utilizing automation, lenders can process more loan applications in less time, expediting credit decisions and improving access for individuals in need. 

Automation not only benefits borrowers but also enhances the overall customer experience. By enabling near-instant decisions on loan applications, lenders can provide a more accurate and efficient process, resulting in higher customer satisfaction and loyalty. This mutually beneficial relationship strengthens the bond between borrowers and lenders, driving customer retention and fostering a positive reputation.

In embracing technological advancements in credit underwriting, lenders can unlock opportunities for financial inclusion, eliminate biases in credit assessment, improve accuracy, and expedite decisions for applicants. By striking the right balance between leveraging  technology and managing associated risk, financial institutions can ensure credit accessibility for all consumers, irrespective of their background or circumstances. This strategic integration of technology not only fosters healthy competition but also establishes long-term success and resilience within the lending industry.

The article has been written by Bharath Vellore, General Manager, APAC, Provenir