CredoLab raising banks’ loan-to-deposit ratio while minimising risk

LDR credoThe Central Bank of Nigeria (CBN) has increased the minimum loan-to-deposit ratio (LDR) of commercial banks from 60 per cent to 65 per cent in the latter part of 2019, which, according to Bloomberg, was aimed at forcing banks to boost credit, mainly to farmers, small-and-medium-size businesses and consumers

The loan-to-deposit ratio (LDR) is used to assess a bank's liquidity by comparing a bank's total loans to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it could be earning.

According to the report, Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 per cent. That compares with 78 per cent across Africa, according to data compiled by Bloomberg, with 90 per cent in South Africa and about 76 per cent in Kenya.

To expedite this LDR, new digital banks and progressive lending institutions in emerging economies are looking at using technology to expedite the process, such as digital scoring methods based on artificial intelligence and Machine Learning, where smartphone device metadata solutions, such as offered by CredoLab and other providers, is used to assessing credit-worthiness instead of traditional methods.

Tarun Kumar Kalra, global head of sales at CredoLab, cited a successful example in Indonesia, which has one of the largest pool of unbanked customers in the world. One of the top 10 Indonesian banks serving more than two million customers wanted to leverage the opportunities in this pool of unbanked customers. The bank had a comprehensive array of products and services being delivered through physical branches, mobile and web banking.

The bank’s mandate was to increase the number of loans it disbursed to the new-to-bank (NTB) customers by using an underwriting process that was fair to the applicants and yet highly predictable of their behaviour, he said.

“There were several challenges, such as increasing approval rates, 85 per cent of the applicants being rejected and the low predictability of existing underwriting process,” he added. “The bank solved this problem by introducing digital scorecards based on smartphone device data, which led to a +107 per cent approval rate, user adoption of 61 per cent and an average of five seconds to approve the application.”

Asked about the uptake of digital smartphone metadata credit scoring methodology, Kalra responded that more than 61 lending institutions have adopted CredoLab’s technology across emerging economies in the Asia Pacific region.

“With our launch into Africa, specifically in South Africa, Nigeria and Kenya last year, we already have three major traditional and digital banks leveraging the technology in South Africa. Financial institutions in Nigeria and Kenya are investigating this technology as a secure and sustainable way of expanding credit into the unbanked markets, and raising banks’ Loan to Deposit Ratio while minimising risk,” he concluded.

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