Artificial Intelligence in loan assessment: How does it work?

January 01, 2020

Artificial Intelligence in Loan Management

Do you know that 50% of first-time loan applicants have to face rejection from financial institutions? That may change with greater adoption of Artificial Intelligence (AI) technology in loan assessment.

While traditional lending systems have relied solely on credit scores, legacy processes and tedious paperwork, AI is already bringing a paradigm shift in the way retail borrowers are assessed for the best Personal Loans .

As per study conducted by National Business Research Institute and Narrative Science, around 32% of financial service providers in the country have already begun using AI tech. Though fintech companies pioneered the use of AI in lending, today traditional banks and Non-Banking Financial Companies (NBFCs) are not far behind in meeting the needs of new-age customers with this new technology.

How AI is being used in lending

Determining the creditworthiness of a borrower without a credit score has been a big problem for financial institutions. This problem leaves many deserving borrowers out of the credit net while lenders lose a big chunk of business. As we mentioned earlier, 50% of first-time loan applicants are rejected solely because lending institutions have overemphasised on credit scores and credit history.

AI and Machine Learning (ML) provide a solution to this problem through predictive analytics, digital footprints and other complex algorithms and data points. Financial service providers now can rely on the digital presence of a loan applicant, by assessing online shopping habits, utility and telephone bill payment history or even social media profiles for determining creditworthiness.

Using AI for loan assessment

Do you know that 80% of the Indian population don’t have a credit score? So, how does AI help both the lender and the borrower if the lender has no credit score? Well, AI can build a credit score for them. Imagine, the immense business potential that it opens up for banks if the unreached 80% of the population have access to credit.

As most online transactions are done through a smartphone today, lenders are now easily able to track a prospective customer’s online activity. Rather than using credit score and credit history, fintech companies are now using something called a “social loan quotient” to assess a loan applicant and determine his/her credit worthiness.

The benefits of AI for banks

AI has many advantages for lenders in online loan management, assessment and disbursal. However, its benefits are not just limited to loan assessment; it also offers other advantages such as:

  • Ensuring faster approval and processing of loans.
  • Helping create a credit profile for first-time loan applicants.
  • Helping banks bring more borrowers to the lending ambit and ensure business growth.
  • Bringing down servicing costs for banks.
  • Enhancing security and regulatory compliance.
  • Improving data and risk management.

Experts believe that AI will help lenders reach over 350 million first-time credit borrowers and will reduce loan delinquencies by at least 33%. AI and ML technology ensures faster detection of error in information and documents provided by the loan applicant, thus helping banks to reject likely defaulters. The use of predictive analytics is 90% accurate in detecting the repayment behaviour of a prospective customer, thus it helps in bringing down delinquencies.

AI will provide an alternate source of data to banks and NBFCs to cater to India’s growing millennial population and open up alternative and new lending opportunities. On the other hand, easy access of credit to millions of households will drive consumption and boost the economy. According to a report by the Boston Consulting Group, the use of AI in loan assessment can help digital lending or online loans to grow to Rs 10 lakh crore business by 2023.

Whether you are a first-time borrower or already one with a credit history, rely on ICICI Bank for online loans of up to Rs 20 lakh with interest starting from 11.25% per annum. Get instant approval and flexible repayment choices when you apply for an online Personal Loan.

Apply for Personal Loan, here.

 

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