RATIONALISING CREDIT DOCUMENTATION
Published on: February 15th, 2019

Nitin Dalmia, SME Business Head

Buying a home is one of the biggest dreams of most urban settlers in India. It will not be an exaggeration to say that most such purchases are funded by financial institutions in the form of home loans, most commonly for the service class. Recently when this dream came true for one of my friends who himself has been a banker for 9 years, I took the opportunity to engage him in a discussion. He shared with me his experience of availing a home loan from a reputed bank and, during the discussion, he narrated his story of how bankers bogged him down and kept coming back to him again and again for one or the other documentation requirement despite him having a clear credit history. With a LTV of 70%, salary of 3 times the EMI, a clean credit history with CIBIL score of 750+ and legal clearance on the property, the deal should have been a no brainer. Yet, what appeared to be a mindless application of bureaucratic rules, made the process an ordeal.

After meeting him, I reflected on whether raising a loan is really so difficult in India. If a person like him finds it difficult (he does represent the top 10% of the economic class in India, after all), what must be happening to the other 90%. It is clear that home loans are, in fact, a cake walk compared to business loans, where these issues are more severe across lending products. The most common complaint from almost all quarters is how bankers procrastinate on business loan applications asking for one seemingly irrelevant document or another and how this is impacting borrowers badly in their businesses. There are various factors that are causing this bureaucratic obsession with collecting documents without application of mind and without considering whether or not all documents are needed in all cases. The causes range from poorly designed underwriting policies, inability to use available data or proxy data, inadequate training or empowerment of employees at an operational level, lack of clear communication with customers and inexperience of credit managers.

While information is important to reach an informed credit decision, underwriting processes need to be able to differentiate among credit applications and seek information based on identified credit concerns. For instance, do we always need the latest CA certified stock and book debt statement in the middle of the financial year for a small business loan when we can verify post balance sheet cash flow from the bank statement? In these times where information on cash flow and financial performance is available in machine readable form from sources like GST database and Registrar of Companies, and when a large component of credit underwriting is moving to automated processes, it should be possible to calibrate information requirement based on preliminary analysis. Further, bankers often forget that what they need is information from documents and not the documents themselves. If we can get automated access to GST forms then do we need stamped and signed copies of GST returns? Or, if charge is satisfied in the records of the Registrar of Companies, do we really need a copy of the no dues letter from the lender?

With respect to documentation, it is important to gauge how much is too much and know where to stop. There will never be a situation of perfect information and trade-offs are necessary to ensure better customer experience without compromising on the quality of underwriting. People at different level of the banking structure – sales, relationship, credit and operations need to be trained adequately and should work in sync with each other. In my experience as a banker, if we have 90-95% of information on the business and its promoters, we should be able decide on the proposal. An obsession with the remaining 5-10% information will only impact client experience and result in longer TAT without necessarily improving underwriting quality.

Another issue that I would like to highlight is the volume of post-sanction documentation. It is time to look at ways that the size of documents can be reduced without compromising legal protection to all parties. The way documentation is being done today doesn’t seem to have changed despite advent of new technology. The number of pages run into hundreds and it is really difficult for borrowers to read and comprehend the fine print.

What could be the solutions to the above problems is something I am leaving here for suggestions and debate. We at Billionloans continue to pursue technology-led innovation to meet our goal of “loans made simple”. All of us in the financial sector always urge governments to work towards “minimum government, maximum governance” to make it easier for us to do business. We must also look inwards and focus on making life easier for our customers in the financial sector.

You can read more about the influence of data on lending decisions in our article on Unsecured Funding for MSMEs.