Process Centric Banking: Loan Origination Solution
- by Manish Palaparthy
There is an old proverb that goes, "The difference between theory and practice is greater in practice than in theory". So, we keep doing numerous "Proof of Concepts" with our own products on various business cases to analyze them deeply, understand and explain to our customers. We then present our learnings as they happened. The awareness of each PoC should help readers increase the trustworthiness of the results coming out of these PoCs.
I present one such PoC where we invested a lot of time&effort.
Process Centric Banking : Loan Origination Solution
Loan Origination is a process by which a borrower applies for a new loan and the lender processes that application. Loan origination includes the series of steps taken by the bank from the point the customer shows interest in a loan product all the way to disbursal of funds. The Loan Origination process is relevant for many kind of lenders in Financial services: Banks, Credit Unions, NBFCs(Non Banking Financial Companies) and so on. For simplicity sake, I will use "Bank" as the lending institution in the rest of my article.
Loan Origination is one of the core processes for Banks as it is the process by which the it creates assets against which the Institution earns most of its profits from. A well tuned loan origination process can affect the Bank in many positive ways. Banks have always shown great interest in automating the loan origination process for the above reason. However, due the constant changes in customer environment, market dynamics, prevailing economic conditions, cost pressures & regulatory environment they run into lot of challenges. Let me categorize some of these challenges for you
Customer Environment
Multiple Channels: Customer can use any of the available channels (Internet Banking, Email, Fax, Branch, Phone Banking, ATM, Broker, Mobile, Snail Mail) to perform all or some of the activities related to her
Visibility into the origination process: Expect immediate update on the status of loan processing & alert messages
Reduced Turn Around Time: Expect loans to be processed with least turn around time
Reduced loan processing fees: Partly due to market dynamics the customer expects the loan processing fee to be negligible
Market Dynamics
Competitive environment: The competition keeps creating many variants of loan products to attract customers, the bank needs to create similar product variants with better offers to attract customers or keep existing ones
Ability to migrate loans from one vendor to another: It has become really easy for retail customers to move from one bank to the other given the low fee of loan processing and highly attractive offers. How does the bank protect it's customer base while actively engaging with potential customers banking with competitor banks
Flexibility to react to market developments: Market development greatly influence loan processing, underwriting, asset valuation, risk mitigation rules. Can the bank modify rules and policies, the idea is not just to react to market developments but to pro-actively manage new developments
Economic conditions
Constant change in various rates and their implications on the rates and rules applied when on-boarding a loan: How quickly can the bank apply changes to rates offered to customers when the central bank changes various rates
Requirements of Audit by the central banker: Tough economic conditions have demanded much more stringent audit rules and tests. The banks needs to produce ready reports(historic & operational) for audit compliance
Risk Mitigation: While risk mitigation has always been a key concern for the bank, this is the area where the bank's underwriters & risk analysts spend the maximum time when processing a loan application. In order to reduce TAT the bank cannot compromise on its risk mitigation strategies
Cost pressures
Reduce Cost of processing per application: To deliver a reduced loan processing fee to the customer, the bank needs to keep its cost per processing loan application low.
Meet customer TAT expectations while reducing the queues and the systems being used to process the loan application: The loan application could potentially be spending a lot of time waiting in the queue for further processing. Different volumes & patterns of applications demand different queuing algorithms. The bank needs to have real-time visibility into these queues and have the flexibility to change queuing algorithms at runtime
Increase the use of electronic communication and reduce the branch channel usage: Lesser automation leads not only leads to Increased turn around time, it also impacts more costs to reach out to customers
The objective of our PoC was to implement a Loan Origination Solution whose ownership lies with the bank and effectively meet the challenges listed above. We built a simple story board for the solution
We then went about implementing our storyboard using Oracle BPM Suite, Webcenter Content : Imaging. The web UI has been built on ADF technolgies, while the integration with core-services has been implemented using the underlying SOA infrastructure. The BPM process model is quite exhaustive can meet all the challenges listed above to reasonable degree.
A bank intending to implement an end-to-end Loan Origination Solution has multiple options at it's disposal. It can
Develop a customer Loan Origination Application from scratch: Gives maximum opportunity to build what you want but inflexible to upgrade and maintain. Higher TCO in long term
Buy a Packaged application & customize it: Customizing a generic loan application can be tedious and prove as difficult as above.
Build it using many disparate & un-integrated tools: Initially seems easier than developing from scratch. But, without integrated tool sets this is not a viable approach either
or
A solution based on a Framework: Independent Services and Business Process Modeling provide decoupled architecture that is flexible. We built this framework end-to-end with processes the core process of loan origination & several sub-processes such as Analyse and define customer needs, customer credit verification, identity check processes, legal review process, New customer registration & risk assessment.
