Overview of AI in Loan Underwriting: Revolutionizing the Lending Landscape

Introduction

Imagine your air conditioner suddenly breaks in the middle of summer. You need to fix it, but your paycheck does not come for another week. What would you do in this situation? Going to a bank to get a loan can take a massively long time, and you will be bogged down by piles of paperwork and lengthy processing times. By the time you acquire your loan, your paycheck has already been paid.

However, in the modern day, banks are not your only option. Today, you can apply for loans online within the comfort of your house. With the rise of digitization among non-banking financial companies (NBFCs), getting a loan is easier than ever. At the forefront of this revolution is the use of artificial intelligence (AI).

Understanding Underwriting

Loan underwriting refers to the process by which financial institutions evaluate a potential borrower’s creditworthiness. Traditional loan underwriting was heavily used by banks and was the foundation for risk mitigation in lending. The issue with traditional loan underwriting resides in its inability to accommodate modern demands. Traditional procedures also heavily rely on one’s credit score, which explains why it is extremely difficult to acquire a loan from a bank with a low credit score.

An effective way to understand loan underwriting is through knowing the 5 C’s: Character, Capacity, Collateral, Capital, and Conditions:

1. Character: Character pertains to a borrower’s credit history and reputation. This would largely depend on your credit score from reputable credit bureaus such as CIBIL.
2. Capacity: Based on your income, employment history, and existing debt, lenders will determine whether the borrower possesses the sufficient capacity to repay the loan.
3. Capital: Your existing savings, investments, and other assets can also give lenders information on your ability to repay the loan.
4. Collateral: Collateral is basically any asset that the borrower offers as security for the loan. This helps banks mitigate the risk of offering you a loan. However, if you do not have collateral to offer, many NBFCs also do unsecured loans as well.
5. Conditions: Essentially just understand the purpose and terms of your loan. This would be the loan amount, interest rate, and repayment schedule.

These 5 C’s underline the principle of underwriting and are essentially how your loan terms and eligibility are determined.

How AI is Changing the Game

Traditional methods tend to be extremely slow due to the large volume of paperwork and manual scrutiny over your records. This procedure often results in delays in your loan and can even inflate the interest due to extensive human labor and infrastructural support (particularly for smaller loans). Naturally, if you apply for a large loan (e.g., home loan), going with banks will be your best option as the cost overhead is amortized by the large amount of money.

However, here is where AI changes the game. Where traditional loan underwriting systems still rely on conventional metrics, AI can sift through thousands of documents and check your social presence within seconds. Your eligibility is thus no longer just hinged upon your credit score, and your loan can be disbursed within minutes of applying.

For lenders, AI is also beneficial. The manual nature of traditional underwriting can lead to deceitful and corrupt practices. However, AI is almost strictly reliant on math and probability, which makes the internal system more trustworthy as well.

RBI’s Outlook on AI in Digital Lending

The Reserve Bank of India (RBI) has taken note of the increasing use of AI in loan underwriting, particularly in digital lending. While recognizing its potential, the RBI has also cautioned financial institutions about certain risks:

1. The RBI advises banks and NBFCs against over-relying on risk models based on pre-set algorithms from fintech collaborations.
2. It emphasizes the need for robust models that are periodically tested.
3. The RBI stresses the importance of using accurate and diverse data sets to mitigate biases in underwriting algorithms.
4. It recommends auditing algorithms to identify minimum underwriting standards and potential discrimination factors.
5. The RBI advocates for ethical AI practices that protect consumer interests, promote transparency, and ensure security and privacy.

Where CreditSea Stands

CreditSea’s platform ensures a quick and efficient loan processing experience, where the application process can be completed in under 10 minutes and funds can be disbursed in less than 2 hours during office hours with the help of AI.

For those who need an urgent loan, CreditSea’s swift service is here to help.

Conclusion

AI is revolutionizing the loan underwriting process, making it faster, more efficient, and more accessible. As digital lending continues to grow, AI will play an increasingly critical role in ensuring fair and transparent loan processing, ultimately benefiting both lenders and borrowers.