Introducing new products is one of the primary essentials for any business to grow, even for businesses in the lending industry. However, most lending businesses from traditional lenders to newer fintech companies, have very little idea as to how to create new loan products to meet the growing financial need of the growing economy. This guide will help you gain a comprehensive understanding of how to develop a new loan product in the present times.
Most companies try to reuse their old approaches and strategies, instead of accepting the dynamic technologies that have come into play in recent days. This has led to several lending companies losing out on modern borrowers, suffering huge financial losses and even closing down in certain cases.
Develop a Loan Product
Developing a loan product allows the lending companies to stay relevant and be able to adapt to the latest trends in the lending industry. It also enables it to have access to the growing number of customers looking to avail credit and potentially grow their clientele. A new loan product also allows the company to unlock more market share by allowing you to incentivize newer technological capabilities.
However, launching a new loan product requires serious planning to ensure that it appeals to the modern borrower. It also means identifying the pain points and creating adequate safeguards to ensure that the product is relatively free from risk for both you and your customers. While a well-developed loan product can bring with it several financial benefits, wrong loan products can have serious financial repercussions. So, we at Adviso have prepared a detailed primer to help you learn how to develop a loan product for your company.
Loan Features (T.R.I.P.)
Essentially, loan products have certain core features that form the basics of any loan product, they are tenor, rate, installment, and plafond. Each of these features has its positives and negatives and the goal is to strike a balance among them to be able to incentivize upon the best of both worlds. Let us know a little more about these features –
- Tenor – It means the duration of repayment for the loan that is being extended. The longer the duration of the loan, the higher the risk of a default. However, the longer the duration of the loan, the cheaper the repayment and the more the number of people attracted to it.
- Rate – Interest forms one of the core decisive factors for customers opting for a loan. While higher interest rates may drive up profit, it will have an inverse effect on the number of customers opting for the loan. Similarly, a lower interest rate may attract more customers but the lender also needs to keep in mind the profitability, operating costs, and risk of default to ensure that the overall profitability of the loan product is not affected. The best way to reduce the interest is to shift to newer technologies which can facilitate lower operating and service costs of the loan by automating processes and shifting to digital infrastructure while ensuring that the potential profits of the lender remain intact.
- Installment – The frequency of repayment also plays a role in the borrower selecting a role. Be it daily, weekly, monthly, yearly, or at one go during the time of repayment, every borrower has their own preference. Generally, most users prefer a more frequent tenure of installment as the amount to be paid in each installment becomes drastically lower, but at the same time, it would also mean higher processing costs for the operator. So, it is very important to align the installments with the income cycle of the borrower to reduce the risk of default.
- Plafond – The amount of loan offered also plays a role in the risk it holds. The bigger the loan amount, the higher the risk. However, certain businesses often need high capital to run and a bigger loan is likely to appeal to such customers and have higher returns. However, it would also mean that if there is a default, the losses incurred due to the loan will be much higher. So, a lending business needs to understand the amount of loan it can extend according to its financial capabilities.
Legal Compliances and Registrations
Once the loan product has been developed, the next step is to ensure its compliance with all the requisite laws and regulations of the territory. With the latest directives of the RBI on the operation of the lending business, the legal compliances have become very strict and so have the penalties. A failure to comply with the legal regulations will lead to serious pecuniary charges and in certain cases, may even carry criminal charges leading to imprisonment[1].
The recent regulations also require the lending company to register their loan products with a regulating authority as prescribed by the government. While the regulating authority might not go into a detailed inspection of the loan product, factors such as the transparency of the loan process, the prospectus or requisite documentation, etc. will still be scrutinized. So, it is important to have all the documentation and legal compliances ready to ensure that the rollout of the loan product is hassle-free.
Developing a Framework
Once the loan product is established, the next step is to create a clear working framework for the product. It includes creating workflows and assets that can facilitate the seamless functioning of the loan product. The idea is to create a simple and efficient working model that will not be prone to errors and malfunctioning. It will involve several factors from the approval to the functioning of the backend system.
A lack of a proper framework will lead to a loss of efficiency in the process and eventually lead to the dwindling of the customers. It will also make the entire process prone to risks of fraud and mismanagement. Thus, developing a clear framework plays a pivotal role in ensuring that the entire process is free from errors and malfunctions.
Underwriting – How to Develop a Loan Product
When the product has been designed, the lending operator needs to decide on whom to offer it to in order to ensure maximum profit. It means taking into account several factors such as the financial stature of the borrower, the ability to repay, the risk of default, etc, and the process of assessing, scoring, and approving credit of the borrower on the given factors is known as underwriting. So, let us understand a little more about the primary factors that affect the process of underwriting –
- Credibility of the Applicant – One of the primary steps is to assess that the person applying for the said loan is a a real person with a legitimate address and business. This can be primarily done by filling out forms. With the coming of third-party automated applications to verify the information provided by the borrower, the process has become more efficient and reliable, but it is always important to double-cross for potential errors.
- Financial Ability – Another important step is to ensure that they have the ability and resources of the borrower to repay the said loan. This can be done by assessing the income, assets, and expenses of the borrower. While it is usually a simple process, there has been an increasing risk of financial fraud which has called for further scrutiny to avoid risks of default. In the usual course of business, a borrower is likely to pay his installments if it amounts to about 30 – 35% of this disposable income.
- Will for Repayment – Simply having the financial resources does not guarantee that the borrower is willing to repay his loan. It is important to track their history of repayment to understand if the borrower has failed to pay his past loans. This can be done either by using manual due diligence or relying on automated trackers. With the emergence of a more centralized and increasingly connected financial database, it has become easier to track such data to ensure that the loans are extended to borrowers with a credible will for repayment.
The problem with underwriting is that it relies on the credibility and availability of the information of the borrower. It becomes a major problem in the case of borrowers who are freelancers, have small businesses, or have no bank accounts, as there is a lack of credible financial data to assess the credibility of the borrower. The need is to adapt newer modes of alternative data facilitated by newer technological capabilities.
Launching the Product
For any product to be opted for by the customers, a proper launch is integral. So, once the product is integrated and ready to go, it is important to have an official launch to help the word get around and attract the customers. Depending on the target consumer base, the loan product can be either launched with a bang to the public or by strategically placing the same to the target customer.
A proper strategy needs to be conceptualized to ensure that the maximum number of borrowers can be attracted at the minimum cost. It will also include creating awareness programs to make the borrowers aware of your loan product and to ensure that the loan products reach your target customers. Thus, the goal is to provide the potential customer with a proper understanding of the loan product and how it will prove to be beneficial for them.
Disbursal and Repayment
Once the underwriting process is done, the next step is to disburse the loan to the borrower. The manner in which the loan is disbursed, either in cash or to the bank account of the borrower, may also have an impact on the risk of the loan due to misuse and side streaming of the funds. An alternative could be to disburse the loan directly to the seller in lieu of the goods that the borrower buys, hence boosting the rate of repayment.
Another factor that a lender should focus on is the repayment. Since it is a step that every borrower has to go through, any inconvenience or friction may lead to an increased probability of non-repayment. An example would be to offer repayment options in service points such as ATMs but a lack of adequate ATMs near the borrower’s residence. Similarly, requiring the borrower to deposit the money in a certain specific savings account for the bank to auto-charge it at a given date every month can also be problematic if the borrower is in a business that primarily uses cash. So, it is very important to understand the requirements and behavior of the borrower and design the loan product accordingly.
Enforcing the Repayment
In most loan products, it is not uncommon for borrowers with ill intentions to default on their loans. So, it is important to set up strict disincentives for default of loans to deter such non-repayment but to ensure that these rules are balanced enough to not scare away genuine borrowers.
A general practice is to deploy field agents who will collect the loans from defaulting borrowers, but the problem is that if the amount of the loan is small, the cost of deploying such agents to recover the money is higher than the profit margin of the loan.
The best way is to design the loan product in a manner that helps make their business successful because a borrower with a successful business is more likely to repay the loan. Another way is to align the disincentives with the business continuity of the borrower. It is generally easier to enforce if the loan is provided to the sellers in lieu of goods. So, if they fail to repay, the borrower will be unable to purchase more goods for their business until their loans are settled.
Limitations of Traditional Loan Products
There seems to be a growing dissatisfaction among borrowers about the lending facilities offered by traditional and established lending operators. This has opened a huge potential for more modernized lending operators to incentivize upon the growing gap and boost their clientele. So, let us understand some of the features that a lending operator needs to keep track of to ensure the smooth running of their operations –
- Lack of Separate Workflows – The higher the number of workflows and forms that your platform has, the more tedious and prone to errors is the loan process. Providing a clear and well-assigned workflow helps reduce the chances of mistakes and makes the entire process more efficient.
- Multiple Platforms – Having to use multiple platforms to process the loan may prove to be ambiguous for the officer and also complicate the process for the borrowers. With most fin-techs offering end-to-end solutions and a one-in-all platform, it is important to leverage such technology to streamline the loan process and boost the user experience.
- Digital Signing – Requiring the borrower to physically come to the office and sign paperwork is a procedure of the bygone era and a serious pain point in the present day. With the advent of technology, the use of digital signing has almost become a mandatory feature of most loan processes, and it can prove to be a serious drawback to miss out on it.
- Double Checking – Despite being extremely careful and aware, human errors are not uncommon at the end of the day. Although not all, but some mistakes can prove to have serious financial consequences. So, it is always best to set up safeguards to double-check the process and the data. With the introduction of automated processes to check such data, it is no longer a cumbersome process and has become an essential part of the process.
- Leveraging Digital Technology – The best way to facilitate the growth of your loan product is by embracing technology. There are several automated cycles such as loan management, data entry, automatic loan approval, digital onboarding, API integrations, timely debt collection, etc. which can be utilized to make the loan process more efficient. However, the use of excessive automation may also make the process complex and lead to frustrating the borrower. So, the goal is to leverage digital technology and balance it out to create an effective interface for the potential borrower.
Why Adviso
Even though you have put a lot of effort into creating an efficient and effective loan product, meeting the paperwork and legal compliances may be a cumbersome and tiring process. So, it is best to take help from professionals such as Adviso. Adviso has a team of legal and professional experts experienced in the process of loan product development.
Our team of professionals will help you with end-to-end paperwork and legal compliance to ensure that the entire process remains hassle-free and seamless so that you can focus on the lending operations. So, drop us a message and our team of experts will be happy to get on a call and help you get to a holistic solution as per the needs of your business.
Conclusion – How to Develop a Loan Product
In the present day, the needs of the borrower have changed drastically due to various factors such as transitions in the business, the need for increasing capital, the availability of easier access to finance, etc. So, the challenge of the lending industry and the stakeholders is to evolve with the dynamic demands of the industry and to meet the needs of modern borrowers.
With the expanding economy, the need for credit is at an all-time high. To be able to tap into the present generation clientele would bring with it a vast potential for profits. However, with the increasing risk of defaults and the growing scrutiny from the authorities, it is important to ensure that all the legal compliances are met and adequate safeguards are in place to ensure that the loan product turns out to be a success.
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