Banks and NBFCs turn to AI to cater to rising credit demand

India's economic growth over the years has been nothing short of extraordinary. This impressive achievement, in turn, has sparked an unprecedented surge in the demand for credit within the country. In the year 2023, banks and NBFCs experienced a significant increase in credit demand, with personal loans leading the way.

As per a report published by CareEdge, there has been an almost three-fold increase in personal loan credit offered by banks and NBFCs over the past six years. Interestingly, these financial institutions have begun to embrace new-age technologies such as AI and ML to automate and streamline their lending processes. Indeed, this is allowing them to cater to this booming credit demand with increased efficiency, while also simultaneously reducing costs.

Notably, before extending credit, financial institutions normally evaluate the creditworthiness of borrowers, which was done manually till about a few years back.

Now, with AI making inroads into the financial services ecosystem, the process has become an absolute breeze. AI-based credit scoring models now effortlessly assess a borrower's credit risk by considering multiple factors such as credit history, income, employment status, and previous loan defaults.

This is done with the help of ML algorithms, which analyse vast amounts of financial and consumer data within seconds to generate highly accurate predictions. This has enabled institutions to optimize their loan approval process, significantly reducing the time and effort required for credit assessment. Faster and more accurate credit approvals are now possible due to AI-driven decision-making processes.

Moreover, AI tools are also proving to be remarkably efficient when it comes to detecting and preventing fraudulent activities. AI-powered fraud detection systems can analyse large volumes of real-time transactional data to pinpoint suspicious activities such as illegal account breaches, abnormal spending patterns, identification of forged IDs and tampered documents, etc.

Other different types of fraud such as phishing attacks, identity thefts and even deceitful payment methods are now also being easily tracked. This ability has empowered banks and NBFCs to adopt a proactive stance against fraud, safeguarding not only themselves but also their valued customers from potential financial setbacks.

With the power of AI, financial institutions are also able to proactively identify prospective customers who have a strong inclination to invest in consumer goods, vehicles, or homes.

It's undeniable that most of these individuals would require credit to finance these substantial purchases. As a result, the application of AI perfectly aligns with marketing teams' objectives, leading to an impressive boost in conversion rates. This not only benefits these institutions but also ensures a mutually advantageous outcome for all parties involved.

Further, AI has been empowering banks and NBFCs to deliver highly personalized experiences to their customers. By analyzing customer data, including spending patterns, financial goals, and preferences, AI algorithms are quick to generate tailored recommendations for financial products and services.

This has enabled banks and NBFCs to offer personalised loan options, credit cards, and investment opportunities based on each individual's unique needs and financial situations. As a result, customers benefit from a more targeted and relevant selection of financial products, enhancing their overall satisfaction.

In addition, AI plays a pivotal role in ensuring compliance with constantly changing financial regulations. This commitment to compliance not only fosters transparency in lending procedures but also boosts customer confidence in the financial institution.

On the operations front, integrating AI has brought about significant cost savings via automation. This enhances profitability and empowers financial entities to provide compelling and competitive loan offerings.

The benefits mentioned above clearly explain why banks and NBFCs are quickly adopting the revolutionary technology – AI. In the future, as credit expansion reaches remote areas, these financial institutions will also be required to serve customers with limited or no credit history.

The role of AI would become more important, as wider and more complex data sets would need to be analyzed to derive insights about these customers. Moreover, as AI continues to advance, its influence on the financial industry will only grow stronger, ensuring a future where banks and NBFCs can cater to the diverse credit needs of their customers with greater speed, accuracy, and efficiency.

Clearly, the integration of AI and lending has tremendous potential in the financial sector, going beyond conventional boundaries and nurturing a more inclusive, efficient, and responsive ecosystem. It will not only redefine lending practices but will also contribute immensely towards making India a worldwide economic force with sustainable and inclusive growth.

Neel Juriasingani, Co-Founder and CEO, Datacultr