Understanding the Lending Lifecycle from Application to Repayment

The lending life cycle is a comprehensive process covering loan origination, servicing, collection, and closure. Understanding each phase is crucial for lenders, borrowers, and financial institutions to ensure awareness of responsibilities and implications at each step.

For lending professionals in fintech, grasping the structure and lifecycle of lending is essential, not only from a product standpoint but also with compliance, risk management, and customer experience.

The blog provides a comprehensive overview of lending lifecycle management and technology, covering the basics for lenders, borrowers, and those curious about loans.

What is lending?

Lending is the business of financial institutions, such as banks, NBFCs, and credit unions, which provide loans to their target segments. Here, financial institutions act as borrowers while their target segments could be businesses, microfinance etc.

Three key entities define the ecosystem:

1. The borrower borrows from a financial institution such as a bank or NBFC.

2. The lender, such as a bank, NBFC or credit union that offers loans and

3. The RBI, the central body governing all the regulations and rules to be followed.

What is a loan?

A loan is when a lender gives a borrower a sum of money, known as the principal, with the agreement that it will be repaid with interest over a specified time frame. For example, a bank might lend Rs. 2 Lakhs as the principal to a borrower at an interest rate of 5%, to be repaid within 2 years.

What are the types of loans?

Loans offered by financial institutions typically fall into several categories based on their purpose, such as personal loans, home loans, medical loans, business loans, commercial vehicle loans, and agricultural loans. These are commonly referred to as loan products.

Each loan product can be further classified into two types:

• Secured loans require the borrower to provide collateral (e.g., property, vehicle, or assets) as security against the loan.

• Unsecured loans do not require any collateral and are granted based on the borrower’s creditworthiness.

This categorisation aids lenders in evaluating risk and setting suitable terms for borrowers.

What is the lending lifecycle?

The lending lifecycle can be understood in two phases: Loan Origination and Loan Management.

Loan Origination:

The loan origination process starts when a borrower completes and submits an application form, along with supporting documents for address and ID verification, the type of loan, and the loan amount requested, either online or in person at the lender's branch. A loan officer conducts an initial review to ensure all necessary documents are provided and the application form is accurately completed. The lender then evaluates the borrower's creditworthiness, determining if the borrower is eligible for a loan and can repay it within the specified timeframe. This evaluation process is known as underwriting. If the loan is approved, the borrower receives a scheme document that outlines the terms and conditions, repayment schedules, and other relevant details. This step finalises the loan closure and prepares it for disbursement.

Loan Management:

Loan management starts after the loan is approved and the funds are given to the borrower. At this stage, loan servicing occurs, involving the lender's ongoing relationship with the borrower, collecting loan payments, and addressing borrower inquiries and support.

What is lending lifecycle management?

Financial institutions, such as banks and NBFCs, handle millions of applications and require a system to manage this process. This is where lending software solutions, such as a Loan Origination System (LOS) and Loan Management System (LMS), become essential. To comply with RBI regulations and effectively manage applications and repayments, organisations require both a Loan Origination System (LOS) and a Loan Management System (LMS).

Loan Origination System (LOS)

An LOS manages all processes leading up to loan approval. It streamlines tasks such as application intake, credit checks and scoring, document verification, underwriting, loan approvals, and final loan closure.

Loan Management System (LMS)

An LMS takes over once the loan is approved and disbursed. It facilitates payment scheduling and processing, manages customer service interactions, and oversees collateral tracking and compliance.

The Future of the Lending Business in India

The Indian lending sector is rapidly evolving through the integration of AI, machine learning, blockchain, and digital Know Your Customer (KYC) processes. These technologies are revolutionising the methods by which loans are originated, underwritten, and managed. Major trends influencing the future include:

• Digital Lending: As fintechs and digital banks become more prevalent, an increasing number of borrowers are choosing entirely online loan experiences.

  
  

• Embedded Finance: Loans are more frequently being provided at the point of sale, seamlessly integrated into e-commerce and service platforms.

  
  

• Alternative Credit Scoring: Non-traditional data sources like utility payments and mobile usage are explored to assess creditworthiness, especially for underserved segments.

  
  

• Sustainability and Green Lending: There is an increasing emphasis on funding environmentally sustainable projects, bolstered by government incentives.

Conclusion

Lending has evolved into delivering a comprehensive digital experience that is swift, secure, and compliant. Whether you are a financial institution seeking to update your systems or a borrower exploring your loan options, understanding the lending lifecycle is essential for making informed financial decisions.