A real-world scenarioA corporate takes a loan from a bank for building a plant. Normally, the bank will disburse the loan amount in tranches, using which the borrower will continue to pay suppliers for plant construction. Now, let us assume that the borrower attempts to defraud the bank by diverting the loan funds. In the guise of making vendor payment, the borrower sends the money to a “distributor” – a shell corporation that exists only on paper. Can the bank be defrauded? Let us examine the whole gamut of information to which the bank is already privy:
- The list of approved parties with whom the borrower is expected to transact for the project. Source: Project documentation
- The fact that the sum transferred to the “distributor”, is very similar to the amount disbursed by the bank for the project. Source: core banking and transaction systems
- The purpose of availing each loan installment. Source: the CA certificate to be mandatorily submitted to the bank
- Whether the distributor is a blacklisted company or in the news for the wrong reasons, subject to frequent tax raids or audits. Source: Big data
Credit risk management in perspective of the RBI mandateThe premise for Early Warning Systems is set here. It all begins with credit risk. Broadly speaking, there are two aspects to defaults – ‘inability to repay’ and ‘no willingness to repay’. Both could potentially result in NPAs or Non-Performing Assets.
Following the Asset Quality Review of 2015, the RBI rolled out a string of regulations mandating the adoption of EWS as a best practice in identifying and mitigating the credit risk posed by Red Flagged Accounts (RFAs). The guideline issued mandated systems that would consider 45 indicators of stress in borrower accounts, measure the accounts with respect to each indicator, and flag incidents to authorities. Indeed, a laudable effort from the RBI.
Learn more about credit risk and how efficient credit monitoring in banks using rt360 can help mitigate these risks.Technology service providers were able to unearth much more data on borrowers from big data sources in addition to traditional data sources and this has aided with insightful decision-making:
- Massive data ingestion and analysis of loan portfolios of banks across the country, products, and industries/customer segments, to take management calls on pulling back or expanding credit to specific sets of customers
- Detect the stress of borrowers from what is reported in semi-public sources, including legal cases, share pledging, dubious business dealings, and so on.
- Listen to rating agencies on what they are saying about their borrowers, industries or the economy
- Listen to online and social media chatter on the promoters of a borrower
Banking analytics plays a big role in mitigating credit risk and ensuring healthy credit monitoring in banks. Learn how rt360 can help.
How Artificial Intelligence is transforming the Early Warning System in BanksEarly Warning Systems rely on tens of thousands of data points to measure and monitor risks, which is almost impossible for humans to replicate. Artificial Intelligence can transform Early Warning Systems, enabling them to detect and flag early warning signals in credit monitoring, make instantaneous predictions and extract actionable insights from disparate data sources, using these four distinct transformative components:
- Collating data from multiple touch points
- Cleansing, validating and restructuring data into valuable information
- Algorithmic processing using next-generation technologies and data modeling to generate insightful early warning signals/alerts, i.e. the early warning signals in credit monitoring
- Case management by channeling alerts to decision-making authorities
To know more about using emerging technologies like AI to identify and alert users of the early warning signals in credit monitoring, click here.
Ms. Jaya Vaidhyanathan
CEO, BCT Digital
Ms. Jaya Vaidhyanathan is an independent Director on several Boards and is focused on bringing in the best global corporate governance principles to India. Her work has found coverage in top news websites like The Hindu and The Times of India. Recently, she pioneered award-winning Early Warning Systems for Indian banks, which have found acclaim in the industry and among counterparts.
Senior Manager at BCT Digital
His profound expertise in the field of corporate and retail banking spanning across Credit Risk, Transaction Banking, Service Delivery and Product Management is close to decade. He is an MBA graduate from Indian Institute of Management, Bangalore.