Sunday, September 6, 2015

Can eVerification reduce the TAT in Personal Loans? Should NPCI venture into eVerification?


          Personal Loans are an integral part of most of Indians financial portfolio. Personal Loans can broadly be divided into formal and informal.

          Informal personal loans are those loans which are taken from acquaintances. Formal personal loans are loans which are taken from Banks or Financial Institutions.

          Personal loans are popular due to low interest rates as compared to Credit Card EMIs. Further, in most cases no collateral is required.

          Banks and Financial Institutions prefer to deal with existing customers. However to increase their customer base, they are open to on board new customers.

          The Personal Loans have to be repaid in monthly EMIs. EMIs are usually recovered through PDCs or ECS Mandates or ACH Debit Mandates.

          In the last couple of months, the popularity of ACH Debit Mandates is on the increase.

          Cash is preferred only for defaulted installments.

          One of the key verification points for new customers is the Bank Account verification process.

          Typically the process is as under:

1)     Customer fills in the documents.
2)    In one document, he/she mentions about his/her bank account details.
3)    The back office team approaches the respective bank branch for conformation about the bank account number and signature verification.

All the above steps take 5-7 days depending on the customer’s location and the respective bank branch location.

Some institutions skip the above process, by directly sending the ECS Debit Mandate for bank verification.

          Apart from delay in processing the loan application, there are chances that the customer’s verification turns out to be negative, due to
1)     the account being closed
2)    account having transaction risks
3)    signature mismatch

These are associated business risks. However with improvements in technology, can the above process to migrated eVerification mode.

The basic technology is in place and an Indian Institution has the broad process in flow. Only minor tweaking is required to get this rolling.

The Indian Institution is NPCI.

The channel which can be adopted is the ACH Debit Mandate Verification mode.
eVerification means, electronic conformation from the customer’s bank that
i)               the account number mentioned in the form is active
ii)             no restrictions are attached to the account
iii)            customer’s signature is valid
No physical papers are exchanged, only digital images are exchanged
9 chief benefits of eVerification

1)     New business stream for NPCI
2)    Enable quick disbursement of personal loans
3)    Decrease the failure rates viz closed accounts/signature mismatch etc
4)    Increase the customer base.
5)    At present personal loans are encouraged in Tier I to Tier III cities which may be expanded to Tier IV to Tier VI towns too
6)    Decrease the reliance on formal sources.
7)    Enable customised offers at the time of festivals without much financial investments
8)    Encourage new customers to join banking industry
9)    Bring in transparency in the verification process