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Bridging the gap between credit takers and credit givers

Credit is a prime financial domain that is always in the spotlight and often characterized by an uneasy relationship between the credit taker (borrower) and credit giver (lender). In the blog, let's discuss and share our thoughts on a niche credit segment - vehicle financing. In addition to auto, recreational and marine vehicles, this segment includes big ticket transportation enablers, like aircraft.

Currently, credit givers in this segment rely broadly on two categorized channels - direct and indirect. For long, banks and credit unions have been significantly dependent on indirect channels, which are primarily dealer-based. This lending strategy not only greatly reduced the costs and effort involved in marketing products but also ensured a steady inflow of business. A critical imperative in indirect lending is the establishment of a long-term relationship between the dealers and members.

The critical question, however, is this: Is the assured quantity of business inherent in indirect lending more important than quality?

With the financial industry in turmoil over the past few years, it's no surprise that the vehicle financing business has suffered. Banks and credit unions are continuously experiencing large defaults by charged-off dealers, resulting in the souring and termination of many business relationships.

What are the root causes?

  1. Unsurprisingly, dealers almost always aggressively pursued high growth volumes. Once they gained the requisite bargaining power, they frequently misused it by lowering the bar required to approve loans. To maintain a long-term relationship, credit givers often agreed to relax the approval requirements. As a consequence, credit givers suffered large-scale delinquency, charge-offs and losses.
  2. In indirect lending, business credit givers have little or no idea about the customer's behavior and lack the direct relationships necessary to explore more repayment options.
  3. A lot of the applications that came through the indirect channel had fraudulent or incorrect information. Some of those cases were overlooked due to the credit giver's negligence - by placing underwriters under tremendous pressure to pass applications to meet business margins. Financial institutions too, turned a blind eye, either due to a high level of trust on the dealers or due to the need to meet their own volume-based targets.

With these factors resulting in the indirect lending channel being blamed for causing major losses, credit givers shifted their focus on building direct channels. The primary motto of a direct channel is to gain an in-depth understanding of the end customer's borrowing patterns by connecting directly with them.


Use case: Direct lending is an area where Infosys was able to provide a large US banks with the significant expertise required to develop in-house analytics tools and techniques for faster decision making. We also provided solutions designed to promote and establish direct lending as a major business channel, a prime requirement for credit givers. Moreover, predictive risk detection and mitigation models were proposed and implemented in different scenarios. These tools and solutions were leveraged by borrowers and lenders - all entities participated in the business process directly or indirectly to:

  • Develop user-friendly web interfaces for loan origination, status tracking and decision display through direct channels
  • Build an interactive online interface with 24x7 assistance available through chat or call
  • Cross-sell vehicle financing products with other retail banking products through retail banking channels
  • Establish a multi-channel platform for direct lending through online and mobile banking, social networking, etc.
  • Automate tele-calling services to reach out to potential customers in order to process applications faster and enhance customer experience
  • Build a data warehouse that contained all of a customer's details, including their transaction history for analytics and business intelligence


Future trend and risk mitigation:

While indirect lending continues to be popular and account for a large market share, particularly among captive finance companies, direct lending is growing at a very fast pace. Building and efficiently managing them will provide credit givers with an undeniable edge in developing a sustainable business. A number of credit givers are leveraging Infosys capabilities to build integrated lending platforms that support end-to-end loan processing for loans that originate through direct channels. Additionally, it is crucial to develop risk-based credit scoring models to identify--and mitigate--risk at an early stage. If managed efficiently, credit givers who use direct lending channels will be able to analyze and predict their customer's needs to identify the gap between what is provided and what is expected. This, in turn, will result in the bridging of the gap between credit takers and credit givers.

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