Internal Ratings Based Approach imperative for banks and NBFCs for Higher Efficiency & a Precise Risk Assessment

“Data is King” but only if one knows how to use it to ones’ benefit. In this fast-evolving regulatory landscape where there is a growing scrutiny on the risk management principles adopted by banks and NBFCs, it has become imperative for lenders to examine a sizable quantity of data including financial records and credit histories to evaluate the creditworthiness of borrowers. Accurate risk assessment is crucial for lenders to make informed decisions regarding their credit exposures and for efficient and optimised use of capital even while ensuring access to credit for borrowers.

This necessitates the adoption of sophisticated solution for credit risk identification, assessment, mitigation, monitoring and reporting.

Traditionally, however, this process continues to be heavily relying on manual evaluation. Interestingly, in a recent social media poll conducted by ICRA Analytics to understand what forms the basis for lending decisions at financial institutions, a majority (nearly 67 percent) said that it was manual assessment while only 33 percent used an automated rating tool.

 It is to be noted that credit scoring reduces the possibility of bias and human error by taking a wider range of criteria into account to deliver a thorough and objective review. One of the significant advantages of credit scoring model is its ability to streamline and expedite the risk assessment process. This efficiency benefits borrowers as well, as they can receive timely decisions on their credit applications, enabling them to make informed financial decisions promptly.

As the lending industry evolves in India towards significantly higher tech orientation and most new-age institutions being built on tech platforms, as well as tighter capital regulations from the regulator, it is imperative for the banks and NBFCs to migrate from Standardized Approach to Internal Ratings Based Approach for better utilization of scarce capital and higher efficiency. 

ICRA Analytics Ltd’s Internal Rating Solution is a proprietary credit risk management software for credit risk identification, assessment, mitigation, monitoring, and reporting needs for banks and NBFCs. It is a workflow-based solution enabled with integration facility. An IRS is required by lenders to enable them to migrate from Standardized Approach to Internal Ratings Based Approach, which requires them to use their own internal estimates of some or all the credit risk components for calculating capital charge on exposures.

Democratising access to credit

Credit scoring has the potential to democratize access to credit by considering alternative data sources. Subjectivity and manual judgement often heavily rely on credit history, making it challenging for new-to-bank borrowers to access credit.

Complying with the latest RBI regulations, BASEL guidelines and industry best practices, ICRA Analytics’ newly launched upgraded version IRS 3.0 is a comprehensive and tailor-made SaaS based risk management tool that can be deployed both on cloud and on-premises as well. A version of the application is accessible over desktops and laptops and additionally over phone (both iOS and Android operating system).

Armed with an industry experience of more than two decades transcending relationships with more than 15 banks and NBFCs; IAL’s recently launched IRS 3.0 has more than 40 models covering Corporates (including Large Corporates, SMEs, Emerging Markets, Greenfield), Retail (including Personal Loan, Housing Loan etc.), Infrastructure (including Road, Power, Generic Infrastructure) and NBFCs (six variants) and the solutions are built-in view of the diverse market and regulatory requirements concerning loan origination, internal risk rating, loan provisioning, stress testing, risk-based pricing, portfolio monitoring and early warning signals. 

The foremost factor that is likely to pull a large section of lenders (more than 57%) towards adoption of an IRS tool is considerable savings in manpower and other resources, currently employed on credit assessments of borrowers. Large NBFCs and Banks that are using IAL’s proprietary risk assessment tool have benefitted from saved hours of manpower and associated costs.

Per the results of the survey conducted, to transition from manual assessment to an IRS tool, it is important for a third of the lenders to achieve increased precision in risk-reward assessment to generate maximized returns on limited capital resource. The IRS offering by IAL gathers interest of large public sector banks enabling them to cater to portfolio specific nuances to enable lending decisions and risk management with a high degree of precision.

The latest version of the IRS has effective Graphical User Interface (GUI) and a robust data framework. The solution is scalable, both in transaction volume and hardware. Built with high-end features like Latest Tech Stack, Standard Workflow, SOA Based Architecture and Report Builder (using slice and dice customized reports), IRS 3.0 has the advantage of Audit Trail & Error Logs and Customizable User Access & Secure Data Transfer. One in ten respondents surveyed, have claimed that availability of audit trail shall encourage migration from manual assessment to an internal rating tool, and this added feature in IAL’s IRS 3.0 is expected to streamline the transition to automation. It is a web-based application that runs on top of Microsoft SQL Server, MySQL and Oracle Database. The upgraded version is easy to integrate with third party applications like EWS, LMS, LOS, CBS and SSO via API with configurable inputs and custom report builder. IRS 3.0 also enables its users to feed in system generated PD and LGD into IAL’s ECL Solution.

This version enables privileged user access with added features of Borrower/ Proposal Deletion and Proposal Reassignment. The solution also enables hierarchy-level access to users with different approving rights to submit, accept, reject, or transfer a proposal rating. IAL’s power-packed technological offering to the financial world has an interactive user interface with optimized workflow for seamless navigation and on-screen FAQ and tutorials to support the workflow. Comprehensive Reporting feature of IRS 3.0 brings extensive reporting capabilities with twelve additional reports added such as Spool Report, Custom Builder Report, Rating Concentration Report, External Rating Report and Transition Matrix Report among others.

IRS 3.0 also comes with an improved dashboard that provides detailed information about proposals and proposals pending at various hierarchy levels. The proposal information can be viewed graphically and can also be downloaded to excel. The additional Settings Feature, Editable Chart of Accounts and Common Search Feature enhance overall user experience and performance efficiency for lenders while measuring credit risks attached with various borrowers.

Getting accurate and timely data will help banks and NBFCs price their risk properly and will also throw up early warning signs on possible stress in portfolio for an early intervention. This will go a long way in ensuring entities to take their lending decisions and putting in place risk management with a high degree of precision.