What’s Holding Back Lending Digital Transformation in Banks and NBFCs?

Digital transformation in the lending business of Banks and NBFCs affects both micro and macro levels, requiring a thorough overhaul of technology, processes, and human resources.

This transformation redefines operations by employing technology to streamline processes, enhance customer experiences, and maintain competitiveness in a price-sensitive market. IBEF notes that digital transformation empowers banks and other financial institutions can offer customised products and services, improving customer satisfaction and loyalty.

While change often meets resistance, it involves adapting processes, technology, and training within specified timelines. Leadership is vital in driving these initiatives, balancing growth and risk while implementing a phased process revamp.

However, challenges arise from the need for alignment between business processes, technology, and workforce adaptability.

Digitally Transforming Lending Operations

Digital transformation redefines operations by utilising advanced technologies to streamline processes. For example, automated loan processing systems significantly cut down the time needed for application approvals. This enhances operational efficiency and supports quicker decision-making, crucial in a fast-paced financial environment. Additionally, integrating artificial intelligence (AI) and machine learning enables banks and NBFCs to assess creditworthiness more accurately, reducing default risks while serving a broader customer base. Moreover, enhancing client experiences is a key focus of this transformation.

Digital platforms facilitate seamless interactions between customers and financial institutions, offering convenient access to services like online loan applications, real-time account management, and personalised financial advice. This shift to a customer-centric approach is essential for staying competitive in a price-sensitive market where consumers have many options.

Change Management Challenges in the Lending Business

Resistance 1. Reluctance to abandon legacy systems

Leadership is challenged with balancing growth and risk, particularly when it comes to replacing legacy systems. These outdated systems are integral to daily operations, and their replacement involves significant financial and operational risks. Avato cite data silos, high operational costs, regulatory compliance issues and inflexibility as key problems in legacy banking systems.

The high cost of new infrastructure, potential downtime, and complex data migration make transitions difficult. Legacy systems are often linked to regulatory compliance, making re-certification of new platforms costly and time-consuming. Integration issues arise as new systems may not connect seamlessly with existing tools or replicate custom functionalities. Additionally, a lack of documentation and dwindling expertise complicate the understanding and safe replacement of old systems. Organisational inertia and employee resistance further hinder modernisation efforts.

As lending transitions from financial institutions using loan software solutions to operating entirely on a digitally driven business model, digital transformation is being redefined in novel ways. To meet growing business demands, banks continue to invest in point solutions and packaged applications. While these solutions address immediate issues, they inevitably contribute to increasing costs and operational complexity.

Resistance 2. Reluctance to abandon legacy systems

Automation and AI raise fears of job loss, causing resistance to digital transformation due to concerns about obsolescence. This fear is intensified by layoffs in the IT industry from 2023–2024. In lending, underwriting teams, loan processors, and customer service representatives are particularly anxious as AI-driven credit scoring, RPA, and chatbots increasingly augment or replace their roles. While these technologies offer faster loan approvals, reduced costs, and better customer experiences, they challenge traditional job structures. Employees worry their expertise may become redundant as AI improves in analysing creditworthiness, detecting fraud, and managing customer interactions. This fear can slow digital adoption and create friction between innovation teams and staff. Successful transformation requires leadership to address these concerns with transparent communication, upskilling, and a clear vision of the continued role of human expertise alongside automation.

Digital Transformation Strategy for Lending

According to MoEngage CEO and co-founder Raviteja Dodda, the core idea is to focus on the entire customer journey and keep customers at the center of digital transformation, ensuring their satisfaction at every step.

To bridge the digital transformation gap, institutions must adjust their strategies to meet the unique demands and preferences of emerging market groups. This might involve creating simpler digital banking systems, offering vernacular language support, and ensuring accessibility through low-bandwidth networks.

To maintain this customer-centric approach, institutions must incorporate feedback loops and agile methodologies into their digital transformation processes. By regularly receiving inputs from customers and employees, banks and NBFCs can adapt their strategies in real-time, ensuring that the changes implemented align with the evolving needs of their stakeholders. This not only increases the chances of successful adoption but also fosters a culture of continuous improvement, reducing resistance to change by demonstrating a commitment to responsiveness and customer satisfaction.

Implement measures to enhance customer awareness of online fraud and cybercrime. Financial institutions would need to strengthen their security practices and enhance customer awareness of online fraud & cybercrime as part of their digital transformation initiatives. Collaborating with technology partners and using robust fintech solutions can help navigate the complex market while ensuring the security of consumer data.

Synchrony Between Processes, Technology, and Workforce

Despite strategic planning, challenges often arise from the need for synchrony between business processes, technology, and workforce adaptability. Each of these components must work in harmony to achieve the desired outcomes of digital transformation.

For instance, if the technology implemented does not align with existing business processes, it can lead to inefficiencies and frustration among employees. Additionally, workforce adaptability is crucial; employees must be willing and able to embrace new technologies and processes.

Organisations that invest in their workforce's capabilities are more likely to succeed in their digital transformation efforts, as they create a knowledgeable and agile team capable of responding to changing market demands.

Conclusion

Digital transformation in the lending business of banks and NBFCs involves a comprehensive shift in technology, processes, and human resources, enhancing operational efficiency, customer experience, and competitiveness. Central technologies include AI, machine learning, and automation, which enable faster loan processing, accurate credit assessments, and personalised services.

Challenges include resistance to abandoning legacy systems due to cost and compliance, and fears of job displacement, particularly in underwriting and customer service roles, exacerbated by industry layoffs and AI advancements.

To overcome these barriers, institutions should adopt a customer-centric strategy, focusing on inclusivity, accessibility, and continuous feedback. Leadership is crucial in managing change, aligning technology with business processes, and investing in workforce upskilling, ensuring synchrony between people, processes, and platforms for successful transformation.

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