How banks can use technology to reduce increasing bad loans

Monday, September 23rd, 2019 00:00 |
Loan. Photo/Courtesy

Commercial banks which rely on data of individuals’ information as the basis to disburse credit have been challenged to do more to contain the ratio of non-performing loans (NPLs). 

Studies indicate that while the NPLs of individuals who obtained credit through mobile banking are still low, the uptake of the loans through mobile banking is on the rise and the default rate equally increasing.

A study presented at Kenya Banker Association (KBA) conference by experts found out that banks are increasing leveraging mobile money technology to undertake banking operations and profitable services but which also exposing them to high  non-performing loans.

Tiriongo Samuel and Dr Peter Wamalwa both of Central Bank of Kenya (CBK), say in a recent survey that mobile banking services have increased drastically to 79.4 per cent this year from 27.9 per cent in 2009.

“Commercial banks continue to leverage on mobile phones to extend loans, deposit savings or by credit processing procedures become less cumbersome but can also increase the ratio of non-performing loans (NPL),” the study says.

Indeed, nearly every bank in the country has a mobile app that enables customers to access credit facility which they provide besides carrying out other critical issues in banks. 

The apps allow bank customers to do banking activities, get instant loan, transfer funds or purchase insurance besides carrying out many other functions – which used to be done by the traditional banking.

“With the banking apps or a bank website on your phone or tablet, you can complete many common tasks, including checking your account balance, finding nearby ATMs and depositing a cheque by snapping a photo,” George Amollo, an expert in IT said.

The value of bad loans in the banking sector is estimated to have hit a new high of Sh345 billion at the end of March.Banking sector data compiled from the lenders’ financial reports shows that gross NPLs increased by Sh27.5 billion or 8.7 per cent in the first quarter of 2019.

Data from KBA — the lenders’ lobby group — shows that 21 per cent of digital loans were not repaid between 2015 and last year and that at least one in five loans have not been repaid since 2017, compared to 10 per cent for customers who take regular loans.

Amollo said the reason why banks still, lend to borrowers who default using mobile banking apps is because most institutions have not networked or been linked as is required in developed countries.

Credible information

“The challenges we have is that most institutions are not networked to allow the banks to get credible information on an individual to enable them to assess them appropriately and therefore may end-up providing loans to defaulters,” he added.

Kenneth Ngosia, an IT expert with a private firm, said credit score – which most banks use does not take into account some of the rich data available in new-age platforms that can help to improve the ability to predict loan defaults.

He said increased adoption of technology, especially Artificial Intelligence (AI), can help banks in getting their NPLs in check.

“AI finance technology has been uniquely designed to tackle the problems facing the lending market and is disrupting the loan-underwriting process and hence the lending industry as we know it,” Ngosia added. 

He said AI finance technology can capture complex patterns in customer’s data analysing many aspects including personal and business financials, revenue, credit score and more to find borrowers that are more likely to default.

 “AI if programmed better can use other things not just loans received from banks or financial institutions to measure the credit score of an individual but take into account other issues such as paying water, electricity etc.,” Ngosia said.

A senior official at KBA said although loans offered through mobile banking apps are still small in quantity, there is need to examine how banks can use technology to grow profits as well as keep the NPLs low.

“The mobile banking is here to stay. It is the banking sector which needs to be vigilant whenever they use it,” he said.

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