In the contemporary world of business, expedited loan approvals and streamlined lending procedures stand as pivotal objectives for both lending institutions and loan applicants. Consequently, lenders are persistently in search of methods to enhance their operations and boost productivity. Automation, specifically within the loan underwriting phase, holds substantial potential to revolutionize this process. In this blog, we will discuss loan underwriting, challenges that financial institutions face and how automation can accelerate loan decision-making.
What is Underwriting and How it Works?
Underwriting is the procedure by which a person or a company accepts financial risk in exchange for a fee. Most of the time, this risk is associated with loans, insurance, or investments. The word “underwriter” comes from the practice of having each risk-taker sign their name under the entire amount of risk they were ready to assume for a given premium.
Even though this mechanism has evolved, Underwriting plays a critical role in the financial industry. The entire Underwriting process is based on the risk related to the borrower returning the loan on time or default.
Underwriters assess loans, particularly mortgages, to gauge the possibility of a borrower paying as agreed and the availability of sufficient collateral in the case of default.
In addition, underwriters look at a policyholder’s health and other criteria to distribute the risk as widely as feasible in insurance. Underwriting securities, which are most commonly done through initial public offerings (IPOs), aid in determining a company’s underlying value compared to the risk of funding its IPO.
Challenges with Manual Loan Underwriting
Underwriting is a critical process in the financial institution where companies assess and evaluate risks associated with loan applicants. While underwriting plays a crucial role in ensuring the financial stability of BFSI companies, there are several challenges and complexities associated with this process. Some of these challenges are-
- Data quality and availability
- Regulatory Compliance
- Data Privacy
- Risk Assessment
Although manual underwriting may seem appealing for clients with unconventional financial circumstances, like those who are new to establishing credit or have a history of financial difficulties, it can be a significant burden on providers in terms of time and resources.