Unable to pay a loan? Worry not, here is what you can do

Just speak to your bank if facing trouble in repaying loan. Yes, that is the first step. A loan turns into a Non-Performing Asset (NPA) if the customer fails to pay either the interest or part of the principal or both. As specified by the Reserve Bank of India, term loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called an NPA.

India's bad loans, as on 31 March 2018, stood at Rs 10.25 lakh crore and the financial constraints brought about by NPAs cripple the economy and the businesses therein. One of the ways that banks are tackling this issue is through persistently working towards early detection of bad loans. However, anticipating which loan could go bad and when can be problematic. For instance, in a typical loan, with a tenure of four to five years, delinquencies start kicking in after 12 months from the start of the loan.

Identifying a potential bad loan
Traditionally, banks and financial institutions have been using the number of payments missed by a customer as the sole parameter to signify the outcome of a loan. Now, lending institutions have developed numerous other methods that assist in making a calculated prediction of possible NPAs. One such method includes evaluating a customer's likelihood to default, based on previous interactions with the customer.

Through the bank's interface with their customers, corresponding data points, such as the customer's financial worries and history of delayed payments, are noted. Furthermore, as an industry standard, customers are given courtesy reminder calls, before the due date of payment and their responses to the pre-recorded calls can provide an insight into their state of mind. These observations can serve as indicators for individuals defaulting on their loan payments.

Another significant development that has taken place over the past few years is the standardisation and strengthening of the credit bureaus. This essentially enables banks to conduct portfolio reviews of their customers, thereby granting them permission to obtain knowledge about the customer and their loan repayment history. Furthermore, accessing information through credit bureaus is not limited to the purview of their own institution, allowing them to retrieve customer information across banks.

With the number of applications submitted to banks, for any service rendered, there is an abundance of data available. A detailed analysis of these databases will reveal several data points, which can provide an early indication of financial stress. In a typical customer application, data points per customer can easily reach in hundreds, where modern data science comes in and provides adequate tools and techniques that can help crystallise this data into clear actionable predictions well in advance.

What banks do to help customers
Now, imagine that this information is available for all loan customers. This will enable banks to categorise, with ease, the loans that are safe and those that are headed towards an NPA. Equipped with this knowledge, banks can take immediate action to mitigate the issue. In these cases, banks can reach out to customers, well before they default, and provide them with the necessary assistance in order to avoid a bad loan. If the bank notices that the customer is indeed stressed about their financial situation, the bank can provide them with solutions such as offering the option of re-structuring the loan, which will help reduce the Equated Monthly Installment (EMI) burden on the customer. The bank may also suggest weekly collections of EMI to reduce the pressure of paying a larger monthly amount at once.

NIP IT IN THE BUD

• Equipped with knowledge about loans that are likely to become NPA, banks can take immediate action to mitigate the issue   
• Banks can restructure the loan to reduce the EMI burden or suggest weekly collection of EMI

By, Gurmeet Singh
(The writer is deputy vice-president and head of data analytics at AU Small Finance Bank)

Source: DNA Money