Credit Underwriting Process and the 5 C’s Of It

Lending to individuals or businesses is risky and a tough decision to be made, which involves credit risk decisions, operational processes, regulatory adherence to KYC norms, fraud checks, etc. which result in the final decision on approval or decline and the loan amount.

Previously, lending decisions were made manually which was subject to high risk, cost unfriendly and laborious process.

With the advent of technology and the digital shift of businesses, credit underwriting and assessment have become automated. The proliferation of data in digital form, computation power to process complex analytical algorithms in minutes, and access to the digital network has made underwriting easy.? The choice is simple between being digital or becoming obsolete.

Nowadays, banks and other financial institutions utilize credit reports generated through an automated system to underwrite loan processing. Credit scores are generated through an automated system that uses algorithms to give each applicant a score. The system then uses scores for decisioning to provide loans, credit card approvals, or mortgage pre-approval.?

Credit assessment and underwriting undergo a systematic process that follows a transparent process resulting in an authentic, cost-effective, and faster assessment.

The process of underwriting is as follows:?

• Acceptance of application from the applicant.
• Intake and review of documents (balance sheet, KYC, bank balance sheets, stability report).
• Pre-sanction visit by the Credit Officer (Personal Discussion), if required.
• Check for the Defaulter list, Credit Score check, Verification, etc.
• Creation of Credit Approval Memo.
• Preparing & Analyzing the financial report.
• Evaluating the proposal.
• Approval/sanction of a proposal by the financial institution.
• Final Review of Documentation, Contracts, and Agreements.
• Credit/Loan Disbursement.

The 5 C's of Credit Underwriting

The 5 C’s of the underwriting process are Character, Conditions, Capital, Capacity, & Collateral. These are the criteria to determine whether to sanction credit or not.

1. Character (Credit History) - It is simply the trustworthiness of the credit lender to repay the amount. It is perhaps the most difficult of the Five C’s to quantify, but probably the most important. In observing creditworthiness customers’ financial details are studied with the help of automated software. Also, the past credit history, repayment with other lenders, credit scores and reports are taken into consideration to determine the “Character”.
2. Conditions - Conditions include other information that helps determine whether one qualifies for the credit and the terms. It is answering the questions as to how the borrower is planning to use the credit amount? A lender may be more willing to lend money for a specific purpose, as opposed to a personal loan that can be used for anything. And other external factors such as the economy, central interest rates and industry trends - before providing credit. This allows lenders to evaluate the risk involved.
3. Capital (Cash Reserves and Liquidity) - It is the current financial state of the borrower. It is analyzed by reviewing the financial statements and the assets and liabilities one owns. The underwriter confirms the assets by verifying your cash, savings and investments accounts, and verifying ownership of the assets of the borrower.

1. Capacity (Cash Flow) - The borrower’s repayment ability for the credit application. The underwriter looks at the income sources, which determines the capacity to service all of the financial obligations. The primary source of repayment is often salaried income. And the secondary source of repayment. would be a spouse’s income, rental or investment income.?
2. Collateral - Collateral is the security provided to the lender for the credit. Providing collateral helps in securing the loan or credit card if one doesn’t qualify well for creditworthiness. The asset provided as collateral depends on the type of credit one has applied for. Secured loans and secured credit cards are considered less risky for lenders, and they are helpful for people who are establishing, building or rebuilding credit.

Once all the components of underwriting are evaluated, the underwriter provides a recommendation for approval.?

Credit Assessment and Robotic Transformation (CART) brings automated credit assessment & underwriting process. It is an advanced tool that uses algorithms with the help of Artificial Intelligence (AI) & Machine Learning (ML) to bring out automated results.?

CART’s versatile features such as Bank Statement Analysis, ITR Analytics, GSTR, Salary Slips, & Account Aggregator Framework helps in a thorough and detailed assessment of financial statement and details. The combined features analyze almost every section of the financial details which helps in generating accurate credit scores and thereby helps in making a better and less risky lending decision. a part of the credit underwriting process.

CART and its features help Financial Institutions in credit underwriting easily and effectively by making them less reliable than the manual underwriting processes.

For more details, visit our website Novel Patterns