VIEW POINT

Modern Corporate lending systems – slingshot to your business growthThe need to modernize corporate/commercial lending systems

Banks are strengthening the technology backbones of their retail banking operations. This was a clear response to the business environment. While on the one hand there was a sharp drop in commercial borrowings following the financial crisis of 2008, on the other, retail lending saw increasing regulations and the competitive need to make it easier for customers to consume the bank’s services. It demanded new technologies and systems as a conse-quence of which IT systems supporting corporate/commercial lending are falling short.

However there are now clear signs of revival in the commercial lending space in the US, many parts of Western Europe and other emerging economies. In its December 2013 market update on commercial loan origination systems, CEB Tower Group reports that the number of new loans originated per week at US institutions have recorded a 6.6% CAGR since they hit a low point in 2009, without significant increase in size. This translates to approximately 140,000 new commercial loans extended each week.

Modernization is imperative in corporate loan origination because only the right information technology can: Make the process smooth, quick and convenient for customers Balance the bank’s need to reduce operating costs and risks with the need to win more customers and expand profitable relationships.

Legacy lending systems are a source of competitive disadvantage in a digital world.

Legacy corporate/commercial lending systems are largely point systems that support discrete functions within the lending process. For instance, separate systems exist to support: “front office” functions such as loan application and gathering of customer data origination;

“middle office” functions such as risk scoring, credit analysis and loan/credit approval; and “back office” functions such as documentation related to denial or post-approval closing.

The absence of robustly-integrated systems forces Relationship Managers (RM), Credit Risk Managers (CRM) and other stakeholders of a bank’s corporate/commercial lending functions to work in silos. They often rely on spreadsheets and documents exchanged via emails or use MIS reports and dashboards that rely on data that is not updated in real time.

This results in high dependence on paper-based processes, redundant data entry (for the same customer, data needs to be entered on multiple systems, leading to a higher risk of errors) and adds to costs and unpredictability of Turnaround Times (TAT). The bank’s customers face delays and poor perceived levels of service and“customer experience”.

Such an environment also makes it harder for banks to maintain consistent standards of assessing and monitoring credit risk, which raises the spectre of the bank’s loan portfolio being exposed to higher-than-prudent levels of credit risk.

Loan Origination in particular is a challenge

In most banks, Loan Origination remains a highly manual process involving multiple hand-offs (e.g. between RMs, Credit Approval teams, Lawyers etc). Although a distinct process in its own right, legacy software supporting Loan Origination is typically a part of some other system such as CRM/ Collateral Management/Risk Rating. This gives rise to various challenges as shown in the table below.

Impact area

Loan Approval Process

Typical gaps in current scenario Business impact

Sequential and generally uni-directional; Sourcing, Approval, Booking and Servicing operate in inefficient silos

Longer Turnaround Times; Less predictabil-ity in outcomes (for both RMs and custom-ers); risk of lost customers due to poor responsiveness; higher risk of bank’s credit policies being violated

Systems Hard-coded monolithic applications Systems do not cover all aspects of approval process

Flexibility is compromised; IT teams need more time to modify business rules, thus forcing manual workarounds that increase risk of poor credit decisions or non-compliance

Data Distributed across disparate systems and formats Buried in documents (including pdf files)

Harder to implement contextual flows, approvals and monitoring; redundant data entry increases risk of errors and forces more spends on infrastructure

The way forward: ECM vs BPM

A well-thought out approach is needed to modernize the Loan Origination system in the context of our digital world. The approach must be chosen in the context of the bank’s corporate lending business: its size, portfolio of products, spread of customers, how lending decisions are made (e.g. local, regional or centralized credit approvals) and of course, the existing IT landscape and its constraints.

ECMOne modernization approach is to treat Loan Origination as a “document-driven” process. Commonly referred to as Enterprise Content Management (ECM), loan applications are treated as a set of documents. In an ECM-based approach, proposals, approvals, collateral details and other data elements are scanned and stored as digital documents. Although the facsimile of all the information is available in digital format, individual elements such as customer information, risk profile, credit score etc. are not. Thus, these data elements cannot be individually accessed or used by the system unless they are manually re-entered. Therefore, workflow cannot be automated efficiently and redundancies cannot be eliminated. This is a significant disadvantage in the digital world in which banks are increasingly expected to operate. Users pass these “documents” from one to another sequentially, thus forcing dependencies. Unless an upstream user takes the required actions and passes the document downstream, further actions or decisions on the loan application cannot be taken. An ECM-based approach

also militates against sustainable business as it depends on documents in physical formats as the starting point.

An ECM-based approach will work efficiently only for relatively simple lending operations. For banks that already have complex corporate lending operations or for those that are likely to become complex due to growth plans, an ECM-based modernization program will, in our view, have a very short useful life and deliver only limited ROI.

BPM with digitization of data

The BPM (Business Process Modelling) approach is based on the view that Loan Origination is the first step of a continuous process that is made up of a series of workflows that operate in cadence (with each workflow being the responsibility of a different set of users). The process is triggered when customer data is entered into the system and concludes when approval is granted or denied and necessary documentation has been generated. BPM tools are used to design workflows and streamline/opti-mize them based on performance parameters that can be pre-defined.

A BPM-based approach makes it possible to apply business rules to individual elements of data that are entered into the system once (and thereafter, available in digital formats for easy use/reuse by other stakeholders and systems). Such data/rules could relate to the customer, the bank’s own lending policies or even regulatory compliance and reporting requirements.

BPM based Loan Origination process

Access detailed customer information View risk exposure for customer, business units, and products Enable in-principle approvals

Sourcing1

Collate data from multiple sources Capture customer and facility risk ratings Create and review loan proposals Link counter-parties and collateral to proposal

Assessment and appraisal2

Access customer, proposal and exposure data Define covenants, terms and conditions as traceable rules Drive individual and committee approvals based on Approval Matrix

Decisioning3

Maintain checklist of required tasks and documentation Create central repository to store all scanned and uploaded documents

Pre-disbursement4

Create facilities Review before future disbursals at defined points in time Track exposure across accounts Track customer and account performance and take action

Post-disbursement5

The way forward: ECM vs BPM

A well-thought out approach is needed to modernize the Loan Origination system in the context of our digital world. The approach must be chosen in the context of the bank’s corporate lending business: its size, portfolio of products, spread of customers, how lending decisions are made (e.g. local, regional or centralized credit approvals) and of course, the existing IT landscape and its constraints.

ECMOne modernization approach is to treat Loan Origination as a “document-driven” process. Commonly referred to as Enterprise Content Management (ECM), loan applications are treated as a set of documents. In an ECM-based approach, proposals, approvals, collateral details and other data elements are scanned and stored as digital documents. Although the facsimile of all the information is available in digital format, individual elements such as customer information, risk profile, credit score etc. are not. Thus, these data elements cannot be individually accessed or used by the system unless they are manually re-entered. Therefore, workflow cannot be automated efficiently and redundancies cannot be eliminated. This is a significant disadvantage in the digital world in which banks are increasingly expected to operate. Users pass these “documents” from one to another sequentially, thus forcing dependencies. Unless an upstream user takes the required actions and passes the document downstream, further actions or decisions on the loan application cannot be taken. An ECM-based approach

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also militates against sustainable business as it depends on documents in physical formats as the starting point.

An ECM-based approach will work efficiently only for relatively simple lending operations. For banks that already have complex corporate lending operations or for those that are likely to become complex due to growth plans, an ECM-based modernization program will, in our view, have a very short useful life and deliver only limited ROI.

BPM with digitization of data

The BPM (Business Process Modelling) approach is based on the view that Loan Origination is the first step of a continuous process that is made up of a series of workflows that operate in cadence (with each workflow being the responsibility of a different set of users). The process is triggered when customer data is entered into the system and concludes when approval is granted or denied and necessary documentation has been generated. BPM tools are used to design workflows and streamline/opti-mize them based on performance parameters that can be pre-defined.

A BPM-based approach makes it possible to apply business rules to individual elements of data that are entered into the system once (and thereafter, available in digital formats for easy use/reuse by other stakeholders and systems). Such data/rules could relate to the customer, the bank’s own lending policies or even regulatory compliance and reporting requirements.

Benefits to Business Benefits to the IT team

Greater ability to accommodate individual banks’ organization structures and processes around risk approvals.

Role based governance helps minimize incorrect approvals and non-compliance

Relationship Managers are freed from data entry tasks (which can be offloaded to a lower-cost back-end Opera- tions team), thus allowing them more time to cultivate relationships.

Improves customer experience by enabling submission of data through multiple touch points

Better workflow management including delegation of tasks, escalations for non-adherence to TATs/SLAs as business rules can be defined that trigger alerts when certain “events” occur.

Better data privacy/security, as “need to know” policies can be efficiently implemented.

Checks and balances including audit trails and portfolio level exposure management becomes easier because

data can be aggregated and reports generated at various levels- e.g. by product type, by region, by RM, by industry

Easier to tweak processes to make them more flexible and adaptable in the context of changes to market conditions

Measurable process optimization can be achieved over a period of time

Most existing specialized systems can continue to be used; not only is this likely to cause less disruption, it will also reduce resistance to change by reducing the need for users to learn new systems that are very different.

Changes to other specialized systems (e.g. limit management, collateral management, credit scoring, proposal management, credit risk approval etc.) can be carried out within those respective systems without significantly impacting other processes/ systems.

Ability to design dynamic processes as the information is captured in true digital format. [By contrast, ECM-based solutions impose static, linear processes that require users to rely on “pushing” documents downstream and upstream as the loan proposal/approval goes from one stage to another. To a customer, this could well mean that approval is held up because of an absent employee and may choose to go to a rival lender].

The same platform can be expanded to support related business functions like Client Onboarding.

ConclusionAs processes are being digitised for resource efficiency, customer delight and regulatory compliance, BPM-driven modernization is more likely to deliver the competitive advantage as opposed to ECM-based approach. This is especially true for multi-branch banks that offer a range of loan/credit products to customers from multiple industries and thus have to comply with complex regulatory requirements. RoI can be realized through enhanced business agility and flexibility, better risk management and governance, lower operating costs, improved process efficiencies, de-bottlenecking of technology constraints and delivery of superior customer experience.

Next stepsOur experts would be happy to discuss the BPM approach most suited for your business/IT landscape. We can also help you answer the key question often faced by banks while evaluating modernization options for corporate/commercial lending IT footprint - should loan origination be combined with existing specialized systems such as CRM or should a specialized system be implemented to support the entire loan origination lifecycle?

Write to us at bfsi@mindtree.com.

A BPM-based approach to Loan Origination offers multiple benefits

As listed below, a well-implemented BPM-based Loan Origination modernization program can yield benefits across business outcomes, process efficiency and technology.