How Finance Companies Use Technology To Avoid Bad Loans

By Subodh / November 26, 2015

A number of industries have been transformed in fundamental way in modern times. While the impact that technology has had on sectors such as communication and transportation is very profound indeed, the impact on other sectors and industries has been very different. Let us consider one such sector today, which is the banking sector.

Modern Banking

The banking sector has also been transformed in very fundamental ways in modern times. One of the ways in which this has happened is in the way that banks receive and process applications for loans.

Finance software

The Bank’s Business Model

The business that a bank does is that of lending money to individuals and businesses – and earning interest money on the principal money that is lent out. Every bank that is run as a viable business has to ensure that its interest and profitability are protected at all costs.

The Basic Process To Ensure Risk Protection

So – every bank faces a significant challenge in deciding whom to give out loans to and whom not to give out loans to. Clearly, if you are a bank and you are interested in being a profitable enterprise, you will lend out money to people or businesses that will repay that loan over the course of its tenure. Only when such loans get consistently repaid over time will your business be stable, sustainable and profitable. Hence the process of choosing your debtors wisely takes the greatest priority in the bank’s operations.

The History of the Basic Process

Historically, this process was done in – what would appear today to be – a fairly rudimentary form. A bank would try to put-together all the information that would be necessary for it to make this decision and then take a decision accordingly based on the assessment that had been made of the loan applicant. Back in the old days – it was difficult to assess loan applicants from other jurisdictions or that did not have bank accounts in specific banks in the US, etc.

Credit Risk Assessment Today

But with the expansion of commerce and technology, banks gradually started having to deal with similar institutions elsewhere in the world and with loan applicants too from all over the world. Today, the credit risk assessment has traveled a long way from where it was during earlier times. One of the processes that made this task a lot easier was the sharing of information about customers by all banks and credit institutions in the US. This has meant that whenever an individual or business applied for a loan from an American bank, the bank will check the history of that borrower with other lenders before.

Role of Checks of Credit History

Credit Score

In the event that the borrower has previously paid all of his or her dues on time, it will be logged as such and construed positively by the latest bank in which the loan is being applied for. In the event, even one installment relating to one loan with any banking or credit institution had not been paid on time, this too will be logged and will be construed negatively by the latest bank considering the loan application. This loan application will very likely be rejected in these circumstances.

Role of Credit Bureaus

Today all banks in the US study credit scores in respect of every loan applicant. These credit scores are typically supplied by one of the three credit bureaus – Experian, TransUnion and Equifax. This score is a mathematical representation of that particular individual or business’s ability and likelihood to repay loans that they might borrow.

Assessment of credit risk by banks today has indeed traveled a long way today. Virtually all banks have very well defined technology and operational processes to carry out the functions relating to loan risk assessment.