Problem statement
Risk-based pricing of loans is essential in today’s financial landscape as it allows lenders to accurately assess and manage risk, align loan terms with borrower creditworthiness, and optimize profitability. By tailoring pricing to risk levels, lenders can attract and retain customers, offering favorable terms to lower-risk borrowers while appropriately pricing higher-risk loans.
The solution
BCT Digital’s rt360 RAROC Solution enables banks overcome pricing and capital allocation inefficiencies in credit origination and decisioning. This approach fosters prudent risk management, enhances profitability, supports competitiveness, and ensures regulatory compliance, making it indispensable in today’s lending practices. The solution is an advanced analytics tool designed to assist financial institutions evaluate the risk-adjusted return on capital within their lending and investment portfolios.
Functional features
- Automated data ingestion by seamless integration with bank systems, such as customer information from rating systems, exposure details from Core Banking, funding costs from treasury, income details from accounting systems, etc. The integration can occur through various approaches such as API and ETL. It ensures data accuracy, consistency, and accessibility across the organization.
- RAROC computation engine enables computation of Risk Adjusted Return for loans and investments based on regulatory guidelines and input parameters.
- Customer data module captures customer specific information such as customer ratings as well as factors including non-credit income that affect overall relationship value. As per data availability, the system can fetch data points such as ratings and limits from existing systems, greatly reducing manual input.
- Facility data module captures information for computing RAROC at facility level, through inputs such as interest rates/fees, facility tenor and collateral details. By analyzing facility-level inputs, organizations can identify opportunities to optimize capital allocation & improve overall portfolio performance.
- Master data module captures slow moving data, such as cost of capital, tax rates, risk weights, operational costs, etc. These masters can be configured by bank admin users with role based access. This module provides much needed flexibility to incorporate risk parameters such as PD, LGD and recovery rates to align with Bank’s risk policies & risk assessment methodologies in the face of upcoming regulations such as incorporation of climate risk into overall credit risk management.
- RAROC output layer provides the deliverables from the solution, namely:
- RAROC report at facility, customer & portfolio level, both actuals for analysis of the past performance, as well as estimates for planning upcoming year budgets.
- Customer RAROC sensitivity analysis, assessing how changes in input parameters such as facility utilization rates affect RAROC outcomes.
- Portfolio sensitivity analysis allows the bank to assess the impact of various parameters such as Risk Weights on overall RAROC. It helps identify potential risks and opportunities within the investment portfolio, enabling proactive risk management and strategic decision-making.
- Configurable workflows allowing maker checker operations for activities such as user creation and masters update, and risk-based workflows for approval of RAROC computation. For example, a highly rated customer with a small proposed exposure could have RAROC computation approved in a 2-level workflow, while a poorly rated corporate with high exposure could require approval from the board level.
- Audit trail of actions taken such as RAROC update, user creation, logins, etc
- Customizable dashboards and reports providing stakeholders with real-time visibility into key RAROC metrics, risk exposures, and performance trends. Reports include customer and portfolio level RAROC reports for measuring profitability and for account planning.
- HRMS/AD integration the solution supports Single Sign-On (SSO) which streamlines user authentication and access management within the organization by integration between the Active Directory (AD) and the Human Resource Management System (HRMS).
- User management module handles user authentication, access control, and permissions management within the system. The module enables admin users to create users and define role-based access to these users.
Technical features
- Microservices-based architecture offering modularity, scalability, fault tolerance and the ability to seamlessly integrate new products in the future with Open APIs.
- Configurable workflows to cater to the unique needs of each portfolio, facilitating bulk closure options and comprehensive audit trail.
- Cloud readiness through a Cloud Native architecture, reducing infrastructure investment, and TCO while ensuring scalability to meet evolving business demands.
- Mobility with a responsive user interface, the solution empowers users to make faster decisions and access critical information on-the-go, enhancing productivity.
rt360 RAROC solution benefits
- Enhanced decision-making with actionable insights and decision support tools to optimize capital allocation, improve profitability, and mitigate risks effectively.
- Improved risk management by integrating various risk factors, and through sensitivity analysis.
- Operational efficiency through streamlined approval workflows, automation of routine tasks, and real-time visibility into key performance metrics. This enables the bank to optimize resource utilization, enhance collaboration among stakeholders, and deliver superior customer service.
- Regulatory compliance with guidelines such as Basel regulations, by providing accurate RAROC calculations, comprehensive reporting capabilities and predefined reporting templates.
Author
Shankar Ravichandran
Senior Manager, Credit Risk
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.
