Can AI Decide Whether You Get a Loan? The Future of Lending in India

Imagine this situation.

Assume Rahul and Amit are both 32 years of age. They work in the same industry and earn ₹1 lakh in a month and are planning to take loans worth ₹70 lakh each.

Both of them have a CIBIL score close to around 780.If the loan applications of the two are analyzed at first, there seems to be no difference.

But if the details of the financial activity of Rahul and Amit are examined, the picture changes.

Rahul has no debt obligations, makes timely payments, and has a consistent cash flow. In contrast, Amit has debts from multiple sources, has borrowed too much, and has delayed payments on some occasions.

Hence, the question here is, who presents lower credit risk?

This is exactly the question that AI can help solve.

Interestingly, AI cannot perform the task of the lender by itself. 

AI can help the lender gather financial information, evaluate credit risk, spot any red flags in the official data, and manage loans in a seamless way.

From Traditional Credit to AI-Employed Credit

In the past decades, the process of receiving a loan has depended on papers and human investigatory work.

An applicant has to provide income certificates, bank account documents, information about their crediting history, and papers that refer to the security.

The lending organization absorbs and assesses this information to make its decision.

However, some changes have already been made in this process.

The employment of machines and machine learning can sort out a large quantity of information and note down some patterns in it sooner than it is done by a person.

Thus, machines help organizations not only to sort out the information they have but also to see how one figure correlates with others, like expenses, incomes, interests, etc.

This does not imply that a machine just examines a loan application and determines “accepted” or “denied.” 

Technology is catching up as a smart companion in borrowing. Even with technology’s contribution, however, the human touch remains important.

Those applying for loans can also use platforms like Loan Bazaar to help in their research and comparison of different loan options.

Digital Lending Is On the Rise, But Not Every Loan Is Treated Lockstep

An essential aspect often overlooked in the discussion about digital lending in India is the fact that digital loan applications do not mean that all loans are assessed in the same way. 

Some types of unsecured lending have entirely digital application and verification processes. Technology can allow lenders to collect, validate, and evaluate their information without the need to secure collateral from the borrower.

For instance, unsecured loan applications, including the personal unsecured loans, rely on finance-related information such as 

• Income and employment information 
• Credit scores 
• Existing debt 
• Bank transaction history 
• Payback behavior 
• Incoming and outgoing cash flows 
• Other verified financial data 

This makes the loan borrowing process quicker and simpler. 

However, secured loans have different requirements. When a loan has collateral secured against it, it requires evaluation of not just the borrower but also the asset against which the loan is taken.

In evaluating a home loan or a loan against property, the assessment process may take into consideration:

• Borrower’s income and repayment potential
• Existing loans and other financial commitments
• Credit history and repayment behavior
• Bank statements and cash flows
• Owning a property and documents of title
• Valuation of property
• Legal verification

Location and other aspects of the property in consideration
Nature and marketability of the collateral in question
Loan-to-value ratio
Applicable lender policies and regulations
Therefore, we should not simply think of a secured loan as a faster version of a digital unsecured loan.

Technology may become digital, but evaluation can remain comprehensive.

Your CIBIL Score Forms Are Only a Part of the Entire Picture
Usually, borrowers tend to think that a high CIBIL score ensures the sanctioning of their loan application.
This is not true.
Let’s look at Rahul and Amit once again.

Both hold a CIBIL score of 780 and earn Rs. 100,000 a month.

Rahul pays Rs. 10,000 per month as his EMI, while Amit’s EMI is Rs. 45,000 per month.

Though their CIBIL scores are the same at 780, their financial debts and capability to repay the loans are different.

The credit score reveals a portion of borrower information but does not tell everything.

AI systems may help in the evaluation of a bigger volume of data concerning the borrower’s money situation and patterns that can be detected without this credit score.

This is the main reason why it is not enough to check the CIBIL score only in order to determine one’s loan eligibility.

It is essential for the borrower to know the income, obligations, cash flow, and repayment capability prior to applying.

The Indian lending system is becoming reliant on digital technology.

Digital development provides lenders with opportunities to collect and confirm financial information more effectively, whenever customers give their permission, and follow legal protocols.

Account aggregator infrastructure allows customers to provide financial data to relevant institutions, as long as it is agreed upon by them. In such a case, clients will have the opportunity to skip providing specific documents every time.

These developments will surely contribute to the growth of data-oriented lending practices and increased efficiency of processes involved in lending.

Nevertheless, it does not mean that having more data will ensure more approvals for loans.

The goal here is to make sure lenders have better information that will help them to evaluate borrowers’ financial condition and make reasonable assessments of risks.

The transition towards the digital economy illustrates the importance of assisting borrowers with their understanding of available lending products, instead of treating all loans equally.

Where is AI Helpful in Loan Processing?

Think of the process of applying for a loan today.

Instead of examining each detail from a zero start, technology can assist with:

Obtaining necessary details from the documents.

• Identifying discrepancies or missing data.
• Studying financial patterns.
• Recognizing questionable transactions.
• Helping fraud detection.
• Studying repayment habits.
• Helping credit risk assessment.
• Automating some parts of paperwork verification.
• Improving communication and application tracking.

In the case of unsecured loans, such automation can help make the process quite simple.

As for secured loans, technology can make certain stages faster, but the lender may still have to check the collateral, the property documents, the legal status, the price, and other necessary requirements.

Thus, the future is not about “digital vs. manual.” It is all about using technology for making things quicker and using the proper checks where they should be present.

In terms of secured loans, it is important to remember that just a digital evaluation of creditworthiness may not suffice.

This becomes even more important in the case of borrowers applying for sizable secured loans.

Let’s say the person is applying for a home loan of ₹70 lakh.

Having the following alone may not help the borrower:

• A good CIBIL rating
• A steady salary
• A positive repayment history
• Sufficient cash flow in a bank account
• A lender would still want to check the property intended by the borrower to put up.

1. The Borrower
   • Does the borrower have the capacity to repay the loan?
   • Analyzing a borrower’s ability may involve looking at:
   • Income
   • EMIs paid
   • Credit history
   • Loan repayment behavior
   • Financial commitments
   • Cash flow situation
2. The Security
   • Is the property or asset acceptable security according to the lender’s policy?
   • The evaluation of the property may include the following:
   • Property documents
   • Ownership records
   • Legal checks
   • Valuation
   • Location
   • Marketability of the property

Is the property or asset acceptable security according to the lender’s policy?

• The evaluation of the property may include the following:
• Property documents
• Ownership records
• Legal checks
• Valuation
• Location
• Marketability of the property

Although technology has helped in the evolution of lending practices, secured lending will still require extra, more thorough evaluations.

This is particularly true for home loans and loans against property, where the value and legal status of the property play a key role in the lending process.

This is why borrowers who use Loan Bazaar to find secured loans need to keep in mind that although the use of technology makes things easier, the lender will require all the necessary property.

Although AI has enormous potential, it is not flawless.

Insufficient, faulty, and biased data can also lead to inaccurate evaluations.

Another essential point is transparency.

In the case of automated systems making decisions about loan grants, it is crucial to ensure that consumers are aware of how their data is utilized and what factors were applied to make decisions.

The Reserve Bank of India has raised important issues, including the points about bias, transparency, explainability, secrecy, and safe execution of technology/AI in finance.

Permission is another important thing to keep in mind when using digital lending and financial data.

That is why the future of crediting is expected to be the one where AI aids people but does not fully replace the judgment of either people or institutions.

How will future applications for loans appear?

The process of applying for loans could undergo a significant digitization.

Borrowers might not have to submit the same documents again and again while waiting for each step of verification to be done.

From an ideal standpoint, the process would be 

Borrower → Consent → The Information Verification → AI Analysis → Assessment of Risk → Additional Checks → Lending Decision.

In the case of unsecured finance, parts of the process could happen electronically, depending on the lender and the kind of product.

If it is a secured loan, the process would also include:

Property documents → Legal checks → Property appraising (valuation) → Collateral assessment.

Thus, technology could save time, but the process would remain responsible.

What Are the Implications for Borrowers?

While technology may make lending easier, the essential principles of responsible borrowing still need to be followed.

Borrowers must:

• Keep your credit score in check.
• Make timely repayments.
• Handle existing obligations responsibly.
• Keep accurate records of finances
• Know how much can be paid every month
• Compare different loan offers
• Know the interest payable on the loan
• Give correct data and documentation
• Know what else is checked in secured loans

Above all, borrowers need to know the difference between being eligible for a loan and being able to afford one. Just because a lender has declared that you are eligible for a loan of ₹50 lakh does not mean that that is the right amount to borrow.

The real question is

How much can I actually repay comfortably?

This is a question that will continue to remain relevant no matter how sophisticated lending technology gets.

There are platforms like Loan Bazaar that would help borrowers through different loan products, taking into account the different factors that may be crucial in their borrowing journey.

The Future: Embrace Technology for Innovation

The future of lending in India will not be just manual or automated.

Different loans would still have different checking procedures.

Unsecured loans will increasingly rely on digital data and the application of AI.

Secured loans will also benefit from technological advances and few automatic processes, but they take more time and implications because lenders have to think about collateral, property documentation, legality, and valuation.

In other words, transformation does not mean that there is no physical checking at all.

It means technology is being used to speed up certain procedures, making them more certain and clear without skipping some checks needed for responsible lending.

Loan Bazaar is going to use this opportunity to improve the understanding of loans by borrowers.

To sum up, AI will have an impact on lending, but trust will ultimately determine its effectiveness.

AI has the capability of becoming a more important part of lending in India.

It has the ability to process information more quickly, to detect relationships, to assist with risk analysis, and to make the process of reaching the decision quicker and more efficient.

But being a technology, not all loans will have the same characteristics.

Some loans may be approved faster, while secured lending would require an evaluation of the borrower’s capabilities to repay the loan as well as an assessment of the collateral backing the loan.

Digitalization and technology development will open up new lending opportunities, but responsible lending should always include proper monitoring of the process.

The key takeaway for lenders is simple:

Digital does not necessarily translate to immediate.

A high CIBIL score alone does not mean that a loan will be approved.

In the case of a secured loan, it takes more than just assessing your credit status.

At Loan Bazaar, we feel that informed borrowing begins with an understanding of the company’s eligibility to repay the loan and the available options.

Frequently Asked Questions

1. Can AI confirm whether I have been approved for a loan?

   AI can assist lenders in analyzing credit information, evaluating risks, and performing parts of the underwriting process. However, it remains the lender’s responsibility to make a decision in accordance with their policies, requirements, and the details about the borrower’s financial profile. 

2. Is the CIBIL score the only factor of consideration for lenders?

   This is not true. Depending on the loan and lender, several other factors can be taken into account, for instance, income, existing debts, payment history, cash flow, employment status or business details, and some other important factors. 

3. Are all loans applied for digitally?

   This is not true. The level of digitalization can depend on the loan product, lender and borrower profile. Some unsecured loans may be processed fully digitally, while secured loans may need more checks as for the collateral. 

4. Why are secured loans subjected to additional checks? 

   Because they involve not only checking the borrower’s ability to repay but also evaluating the asset used as a guarantee.

5. Is it possible to have a home loan processed through digital means?

   A number of stages in obtaining a home loan can be completed online, including gathering of information, processing of documents, and some of the verification steps. However, the real estate-related and other checks required by a lender may have to be performed before the final decision is made regarding the loan.

6. Do digital technologies impact loan approval speed?

   Automation of some of the document process and verification operations may lead to speeding up the process. However, there are some factors influencing the processing time, such as the lender, type of loan, borrower, and checks needed.