By Anish Kumar | [email protected] | +91-9650900223
INTUITIONS VS DATA DRIVEN DECISIONS IN CREDIT UNDERWRITING
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.
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!!