Trying times have spun the way financial institutions operate. With the ease of payments, transfers, and money, millennials are used to instant and accessible financial services more than ever. As a result, traditional banks often seem unappealing to them. With parallel developments in the digital lending space, more individuals with no credit history have access to loans.
With the advent of alternative digital lending products, people with limited financial resources and those who do not meet the requirements of traditional lenders have been blessed with a slew of options to choose from. With collateral loans gaining popularity against traditional lending, let us see the role of collateral valuation in the changing digital lending dynamics.
What is Collateral Valuation?
Collateral is a simple term used to define borrowing money. Accepting collateral against existing loans has been in practice in formal and informal lending. However, collateral brings security to mitigate risks associated with collateral loans.
The reason is an easy stake on the asset in case of failure to repay dues. Hence, collateral valuation is simply used by a digital lending firm or financial institution to determine the value of the collateral it uses as security.
It is one of the many aspects of collateral management which helps ease the digital lending landscape. Let’s have a quick look at the other aspects that play a vital role in this whole collateral management process.
Various Functions Involved in Collateral Management
Credit origination, fulfilment, and monitoring are all part of the collateral management process. The credit and collateral processes are tightly coupled to ease the lending process.
Although collateral valuation is a significant aspect, other functions collectively contribute to a systematic approach to this whole lending process. They are as follows:
- The collateral acquisition is the process of onboarding assets and collecting collateral data. For example, collateral lending against ships needs to find the ship’s type, purpose, and usage-related details.
- The collateral valuation function handles how assets are valued. Therefore, it is essential to note the market value, assessment methods, appraiser details, and valuation dates.
- Collateral allocation refers to connecting assets to various exposures. Risk managers use this capability to determine how much capital is needed for risk-weighted assets (RWA).
- The lender registers the asset during the collateral perfection and establishes its claim. In case of delinquency, the bank usually has the first claim on the collateral so that the chance of recovering funds is more significant.
- Collateral review is prompted by establishing the current asset value and reviewing the contract agreement. Stocks, which are volatile assets, must be valued in real-time.
- To release the claim on collateral, collateral release/recovery must be performed once the borrower has met their obligations. As part of the release process, notification of lien cancellation to the notary is required.
So, as you see, the above functions make the lending process more streamlined. However, quite a few collateral management challenges are bottlenecks to the lending ecosystem. What are they?
Challenges Faced in Collateral Management
- The inability to capture a wide range of assets and related data.
- It is impossible to keep detailed records of different asset types in one place.
- A legacy application constrains and deteriorates the quality of valuation information.
- It is a time-consuming and manual process to achieve perfection.
- Collateral review and tracking mechanisms are not automated.
- Collateral recovery or release processes are not streamlined, leading to manual processes.
- A collateral agreement cannot register multiple assets and vice versa.
With such challenges on the table, is collateral lending progressing positively? The answer is yes! With the help of innovative technological solutions, collateral valuation is changing for good. How? Let’s see.
How is Collateral Valuation Changing in the Era of Digital Lending?
Global economics changed, and we started exploring a new virtual normal. Businesses have become digital, but mindsets are stuck in legacy systems. See how digital lending has given hope to transforming collateral management:
- End to end workflow management.
- Automate the calculation processes across collateral assets.
- Clear segregation between the help & registration.
- Assist in re-possession of properties and recover costs.
An efficient lending process
- Support a variety of collateral types.
- Manage exposures to collateral to minimise RWA.
- Provide a seamless experience to customers.
- Real-time event-based feeds in the lifecycle & valuations.
Improved risk management
- Improve the quality of credit risk data.
- Providing data snapshots at various lifecycle points to develop a necessary risk model.
- Support collateral reviews by the policy.
- Alerts in case of under or over collateralisation.
Documentation & reporting
- Analyse various parameters via configurable dashboards.
- Providing regulatory reporting with critical data elements.
- Provide an accurate statement of the security interest in the asset.
- Capture the party details & roles involved in the collateral agreement.
These changes help the collateral valuation system, but it is a constant process to achieve perfection. As a result, there will be a need to improve current collateral management solutions.
It would be helpful to develop an exhaustive list of capabilities that should be formed by evaluating the portfolio size, collateral types, geographic spread, and coverage of business lines.
For instance, the program timeline can be accelerated if the team understands the collateral business process, data models, and high-level epics that match the capability list.
It’s a long road, and the process looks daunting, but with Precisa, you are covered. The goal is to facilitate seamless digital lending in an uncertain and socially distant world. Precisa helps hundreds of organisations make more informed decisions using its state-of-the-art solutions. As a result, organisations perform better, and customers are happier.
It is essential to stay abreast of these revolutionary commerce process changes to ensure a successful end-to-end solution. Get a free 14-day trial of Precisa today, and discover how Precisa makes financial management more accessible, safer, and more user-friendly.