Industry Insights

The Importance of KYC Process for Banking Industry

Know Your Customer (KYC) is the first crucial step in credit analysis for any commercial lending firm. The primary objective of this process is to prevent money laundering, and to manage risk and financial frauds.

As per RBI regulations on KYC, the objective of KYC/Anti Money Laundering (AML)/Combating of Financial Terrorism (CFT) guidelines is to prevent banks or Financial Institutions (FIs) from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks and FIs to know and understand their customers and their financial dealings better, and so manage their risks prudently.

KYC is an integral part of the banking process. Regardless of whether it is for retail banking or corporate banking, KYC norms are non-negotiable.

In simple terms, KYC involves four essential steps:

  • The identity of the customer: Individual, Partnership, Sole Proprietorship Firm, Company, or LLP
    The business’ address: Registered address where business activities are being carried out, such as offices, factories, depots, or warehouses
  • Statutory registration: Whether the business is compliant with various statutory registrations pertaining to RoC, Income Tax, GST, etc
  • Legality of the business: Whether the business is legal as per Indian laws

To verify the above details, RBI has issued a list of documents which can be submitted to banks and FIs for further due diligence and acceptance.

The KYC process is lengthy and time-consuming since it involves a lot of documentation, compliance checks, and verifications. Often, this can take 2-3 weeks to complete and also entails an enormous cost to banks and FIs.

Although it is a legal mandate for banks and FIs, KYC also creates a miserable experience for customers. Over the year banks and FIs have adopted technology to automate KYC processes. Ideally, minimal customer interaction and contact is needed during KYC, as most data are available on public domain. Asking the customer to submit the same data will only delay the process.

How can Probe42 significantly improve the KYC process?

  • Improve cycle time: Access company incorporation documents such as MoA, AoA, DIR-12, segment-wise industry analysis, and director details along with their other directorships
  • Improve customer experience: Seamless KYC process is essential to boosting the customer experience and long-term relationships with the bank
  • Save Cost: Time is money. So, digitization will not only reduce the cycle time significantly but also replace unwanted paperwork for both customers and banks.

Probe42 is a one-stop solution for all company information in India. With Probe42, you can access the information of over 1 million companies — anytime, anywhere.

So, log in now and explore your company of interest.

The Information Imperative – Part II

To appreciate why efficiencies driven by information are crucial to the banking sector, let us do some number crunching. Note: All data below are results of Probe research.

Broadly speaking, banks’ income can be categorized into interest income (interest on loans to borrowers) and non-interest income (fees and commissions, profits from trading, etc.). On the expense side, we have interest expense (interest paid on deposits), and operating expenses (sales and marketing, legal fees, credit and risk analysis, employee compensation and benefits, etc.).

So to get a sense of a bank’s margin spread, we can look at:

Spread = ( InterestIncome/TotalFunds + (Non-InterestIncome)/TotalFunds ) – (InterestExpense/TotalFunds + OperatingExpense/TotalFunds)
Let’s see what the data is telling us. We will use consolidated data on all major Indian banks over the last 25 years, starting at 1992, right after liberalization.

Here is how interest income is trending over this quarter-century:

The Information Imperative

Over the course of the ‘90s, interest income began trending upwards, reaching a high-point of 11.22 in 1997. Over the ‘00s and ’10s, this metric stabilized, with a gradual trend downward. In 2016, interest income to total funds stood at 8.44.

Over the next few decades, interest income will continue to trend marginally downward; loans will get repaid or renegotiated at lower rates as the economy matures. While the Indian market still has sufficient room to grow until it reaches maturity, the end state is inevitable — interest income growth will not keep rocketing upward.

Non-interest income (primarily fees) has meanwhile remained steady at around the 1 mark over the last 10 years. In fact, it has declined from its high point of 2+ in the mid-00s. Indian banks still are quite heavily dependent on interest income, and have not diversified their income streams to the extent that banks in advanced economies have.
Now let us look at the expenses:

Interest expenses, which fluctuate depending on rate cuts and hikes by the RBI, have centered around the 6-mark.
Over the 90s’ and 00’s, operating expenses were brought down from around 3.5 to about 2. This was due to efficiency-improving factors such as information technology. Over the last decade, though, operating expenses have remained flat.
Let us now merge the 2 pictures to look at the margins over these 27 years:

As you can see, incomes and expenses have been moving up and down more or less in tandem over the last two and a half decades. But with interest incomes trending gradually downward, with all else being the same, margins begin to get squeezed in the coming years.

In such a scenario, how will banks ensure they maintain (and improve) their spreads? How do they stay above water?
They have two levers at their disposal — increasing non-interest incomes, and decreasing operating expenses.
The first of the two — increasing fee and other non-interest incomes — is quite limited in the amount of heft it can provide. The increased competitiveness of the financial services marketplace — and hence the market’s price sensitivity — places hard limits on this lever. Which leaves us with the second option — reducing operating expenses.

To remain competitive and profitable, banks need to launch a new wave of efficiency enhancements. While the earlier wave (in the ‘90s and ‘00s) was driven by systems integration and the Internet, the next round will be driven by data and analytics.

With easy access to relevant and rich data, banks can drastically improve targeting and decrease cycle times across the board, whether in sales or credit disbursement. Data can drive accurate credit and risk analysis, bringing down the proportion of NPAs. High-quality on-demand information can drive down customer acquisition costs. Portals and APIs can load data automatically into credit models to display rating scores in seconds. In the long run, data will enable sharper targeting and predictive analytics, which will not just bring down costs but also propel growth.
In summary, to stay competitive, banks need to reduce OpEx; and to reduce OpEx, banks need data.

Closing the Information Gap

The need of the hour is for on-demand information on Indian companies — information that is comprehensive, validated, and clean. Sales, credit, and risk teams need to base their decisions on hard data; they need to expand their models to incorporate information on companies’ legal history, defaulting history, directors’ track records, etc. They need to understand the connections between companies — via common directors or owners, for instance — to estimate risk and foresee ripple effects.

The path to a more profitable and sustainable future for banking in India is paved with data and analytics. Ultimately, closing the information gap will result in a fairer and more competitive marketplace, and will power us toward a better India. And that is exactly the vision that Probe Information Services is working toward.

The Information Imperative – Part I

The digital revolution is reshaping industries across the globe, with data analytics being a key driver of this transformation. Insights gained from data are integral to the strategic decision-making apparatus of companies, enabling cost reductions as well as revenue growth.

Among the industries with the potential to benefit most from this data-powered digital transformation, Financial Services is consistently ranked at — or close to — the top. Whether in determining future product offerings, getting a better handle on risk and credit worthiness, or in cutting costs in the customer acquisition process, the use of data is beginning to redefine banking across the globe.

Data is Enabling Consumer-centricity

According to EY’s Global Consumer Banking Survey, 70% of consumers from around the world are willing to provide more data on themselves, if it results in more relevant products and services being offered to them. Consumer banking is taking the lead in leveraging data, in large part due to the proliferation of relevant data sources. For instance, banks are utilizing customers’ social media feed to determine what products and services to offer. Diverse data points such as social media friend-lists, online shopping behavior, and telecom bill-payment history are used to rank customers by credit-worthiness.

Indian banks are leading by example in this regard; from large players like HDFC and ICICI to smaller regional players, the systematic use of consumer data is resulting in vastly reduced credit disbursement cycles, lower risk, and superior customer relationships. In addition, government initiatives such as JAM (Jan Dham Aadhaar Mobile) are decreasing the information gap between banks and their customers, further enabling the move toward a data-driven future.

On the commercial banking side, though, the picture is not so rosy.

Commercial Banking – The Data Deficit

India Inc. is massive, fast growing, and very opaque. And largely unlisted. While the importance of incorporating data into commercial sales and lending decisions is well appreciated, the sheer lack of access to real-time, high-quality information has been a hurdle for banks. Information on companies — particularly unlisted companies, that make up 99% of the economy — has traditionally been:

Unreliable — Given the unavailability of third-party validated data, banks rely on documents provided by the very companies they are evaluating, exposing themselves to potential fraud. In addition, the information gathered is often out-dated.

Incomplete — To gain a solid handle on credit risk, a variety of information is required — from financial statements and ownership structures to legal and compliance documents and more. Banks find it hard to pull together all of these data-points, resulting in an incomplete picture.

Fragmented — The information that banks are looking for is spread across various disconnected sources. Credit teams spend long cycles pulling together notes from MCA, credit bureaus, ratings agencies, etc.

This information gap explains why the cost of credit to business borrowers in India is significantly more than that to individual borrowers. It also partly explains the headlines in our business papers, which talk about the large NPA (non-performing assets) problem facing the country.

Why is information-driven efficiency important for banks?

In Part II, we will pick apart the numbers that make up banks’ bottom-lines, to understand why information-driven efficiency is not just a luxury but, in fact, a necessity.

View Part II

5 key ratios for commercial loan underwriting

Over time, financial ratios have been used to quickly evaluate the financial and operational health of a company. Ratios are precise, yet elaborate enough in their own way.

Most of these ratios can be calculated through financial statements and then compared with industry benchmarks to get a broader understanding. For bankers, the interpretation of the ratio is far more critical than the computation. Validation of solvency and performance are the two essential characteristics of such financial ratios.

Selection of critical ratios is essential for bankers to access asset management, capital management, liquidity, risk, and profitability.

To make it easier we have listed five key financial ratios required for commercial loan underwriting:

Profit Margin Ratio: This is a widely used profitability ratio, and it indicates the amount of profit generated over sales. This ratio measures the company’s ability to earn enough profit to sustain its business. Profit margins often vary from industry to industry, so, a prudent banker should always compare it with close competition and with the average industry standard.

Debt Ratio: This is a solvency ratio, which indicates the debt level of the borrower as a percentage of total assets. A lower debt ratio suggests more stable business and the higher is reverse. A ratio of 0.5 or less is considered as healthy, as this means the company has two times the assets as compared to liabilities. Anything more than 0.5 should be carefully examined before consideration.

Loan to Value (LTV) Ratio: This is a risk assessment coverage ratio that is very critical for mortgage underwriting. The LTV ratio ensures that the collateral is worth higher than the size of the loan. Higher the LTV ratio, more the risk involved.

Debt Service Coverage Ratio (DSCR): This is a liquidity ratio, which indicates the amount of cash generated by the business to service its debts (principal, interest, and leases). DSCR validates the borrower’s capacity to pay back the debt and keep running the business. DSCR between 1.25-1.5 is a relatively safe number to consider. However, it differs from business to business and depends on the risk aversion policies of the bank.

Net Worth to Loan Size Ratio: This ratio is used to compare the borrower’s net worth to the size of the requested loan. A high net worth indicates stable financial health, ultimately ensuring the repayment of the loan.

Ratio analysis is a proven technique to carry out quantitative analysis. However, financial ratios often vary across different industries and sectors, and comparisons between entirely different companies might not be advised.

So, it is advisable to examine industry peers through PEER COMPARISON to get more meaningful insights about the industry.

How can Probe42 help ?

Use Probe42 to:

  • Access key ratios by downloading financial statements in an excel format
  • Compare with peers in the same industry
How Data is Transforming Corporate Relationships for Banks and NBFCs

Data has changed the way retail lending is done

Data on retail clients has made a significant impact on the way banks lend to retail customers. Various information sources such as PAN, Aadhar, and Credit Bureau scores have significantly transformed the way banks lend to individuals. Cycle times to identify, qualify, verify, and do credit checks on individuals have significantly come down too. As a result of the lower cycle times and related costs, there has been a rapid proliferation of retail loans. The current boom that we see in retail lending has its origins in ‘good data’, the story of which goes back well over a decade.

A similar transformation has started to happen in corporate lending

Very similar to the way retail lending has been transformed in India, we are beginning to see a rapid transformation in the way lending is happening to businesses, especially to the mid-sized and smaller companies. Note that currently there are over 10 lakh active companies, of which nearly 3 lakh companies have existing borrowing relationships with banks and other institutions. These figures will double over the next 5-6 years, as the economy continues to expand. The challenges to tap into this opportunity are massive for the banking industry as the stakes are quite enormous. However, the winners have much to gain. Firms that leverage data, and do it well, will have a significant head start on this journey.

How can Banks and NBFCs benefit through use of data?

Early adopters are showing the way

Sales Identification and Qualification

Today, there are over 10 lakh active companies and nearly 3 lakh existing companies with borrowing relationships in India. As this number continues to grow, it is essential for banks to use data to identify and qualify potential customers very early in the sales cycle. In today’s information-rich, digital world, unlike say five years back, it is possible to qualify prospects very early in the sales cycle. The cost of converting potential customers has dropped by nearly 90% over the past five years. Pre-qualifying the sales funnel will increase the productivity of the sales teams nearly twofold.

Also, by using data to identify the right customers, the sales teams can significantly expand their qualified target markets, at pace.

That said, transforming the sales team’s existing processes, which in many cases are still based on Rolodex-based approaches, to a more data-oriented approach is a key challenge and opportunity.

Faster Credit Analysis and Disbursement

Gone are the days where your ability to analyze a case better gave you a competitive edge. With information on prospects now widely available, speed is the only factor that will provide you with a competitive advantage. (We remember a personal loan used to take 15 days in the mid-90s, whereas we take about 30 seconds now.)

The availability of high quality, reliable information can significantly enhance the speed of decision making, thereby giving the lender a competitive edge in the marketplace. More than 50% of the information that is being collected from the borrower today is already available in the public domain.

Use of information also significantly reduces cycle time, therefore improving employee productivity. We have already seen several hours being cut out of the business credit analysis process thanks to the introduction of data.

Effective Monitoring

Scale and growth are often accompanied by their own challenges. The number of companies that have relationships with banks is rapidly increasing. Many of these companies leave a long trail of digital footprints. Regulatory requirements are also becoming stringent, making more reliable data available in the public domain, hence dependence on data is increasingly important. Active monitoring of these companies on an ongoing basis needs to be supported by data and analysis.

Amongst the significant challenges bankers face is the multiplicity of data sources, lack of standard identifiers across sources, and credibility of data sources. Given the above, it is not an easy position to be a banker in today’s world. In such a situation, technology and organized data can play a significant role in helping support the banker through the journey of monitoring.

Summary

Overall, including employee productivity, payback on the investment in data is significant. In nearly all situations, gains from using it effectively are far ahead of the cost of the data.

We see early, but strong trends, on how data availability is transforming the way business lending is done in India. Quickly and rapidly, precious minutes and hours are getting chipped away from the entire credit qualification, disbursement, and monitoring process. We are rapidly moving towards the day when a business, as long as it is good, has credit available on tap – very similar to the way retail lending operates.

A Little about Companies in India

April 2018 The Probe Newsletter
We present below facts about companies in India that are based on Probe analysis and estimates. This analysis is as of early April, 2018

Universe of Registered Companies

Universe of Registered Companies

  • Currently, there are 1,118,623 active companies in India, out of 1,838,627 companies ever registered.
  • Madhya Pradesh had 21,850 active companies, of which 2,358 companies were registered in FY 2018.
  • 20.5% of active companies in India were incorporated after CY 2015.
  • The chart does not include LLPs.

Probe New Company and LLP Incorporation Index

  • The Probe New Company and LLP Incorporation (PNCLI) Index was created using Dec 2000 as the base year, with 31,512 new companies and LLPs registered during the base year.
  • In Mar 2018, index value stood at 447 with a total of 141,002 new companies and LLPs incorporated in FY 2018.
  • In the last quarter of FY 2018, 36,454 new companies and LLPs were incorporated.
  • New company incorporation in Mar 2018 witnessed 50.3% growth as compared to Feb 2018.

New Company Incorporations

  • In Mar 2018, 12,039 companies were registered in India.
  • Among newly registered companies, 11,795 companies are private and 244 are public.
  • In Mar 2018, new OPC company registration saw a growth of 38.4% per month.
  • 10.3% of new companies registered in Mar 2018 had paid up capital Rs 10 lakh or more.

New Company Incorporations: State-wise Data

  • In Mar 2018, Karnataka stood third with 1,136 incorporations, of which 82.5% companies were based in Bengaluru.
  • 1,111 new companies were registered at RoC Kanpur, of which 812 companies had paid up capital of Rs 1 lakh or less.
  • In Tamil Nadu, 885 new companies were incorporated in Mar 2018, constituting 7.4% of all the companies incorporated in India.

New LLP Incorporations

  • In Mar 2018, 2,019 LLPs were formed in India.
  • With 261 LLPs, the manufacturing sector registered 12.9% of all LLPs in the month.
  • A total of 297 LLPs were registered at RoC Kolkata, amounting to 14.7% of total LLPs formed during the month.
  • 242 LLPs were registered in Delhi in Mar 2018, accounting for 12% of all incorporated LLPs.

Nationwide Spread

  • There were 1,118,623 companies active in India as of Mar 2018.
  • 15.1% of active companies in Maharashtra were registered in Pune city.
  • As of Mar 2018, 6,812 companies were listed in India, of which 12.7% companies were registered in Delhi.
  • Telangana had 54,660 active companies, which constituted 4.9% of all active companies in India.

Statewide Spread

    • Currently, there are 29,896 active companies in Haryana.
    • Gurgaon has 13,699 active companies, which account for 45.8% of all the active companies in Haryana.

With 4,880 active companies, Faridabad stands second in number of active companies.
617 active companies in Haryana have paid-up capital of Rs 10 Cr or more.

For more in-depth analysis for other states please reach out to Probe

Paid Up Capital

  • 34,400 active companies in India have paid up capital between Rs 2Cr to Rs 5 Cr.
  • As of Mar 2018, 1,978 active companies in Mumbai had paid up capital of more than Rs 25 Cr.
  • 113,983 active companies that had paid up capital between Rs 5 lakh to Rs 15 lakh, accounted 10.2% of the total number of active companies in India.

Directorship Overview

  • There were 2,099,053 active directors in India as of Mar 2018.
  • As of Mar 2018, Madhya Pradesh and Chhattisgarh collectively had 68,334 active directors.
  • Currently, there are 83,215 active foreign directors in India.

About Probe

  • Probe is an independent information services company focused on providing financial information on unlisted and under-covered companies in India.
  • The Probe42 platform has been extensively used by both banks and corporates
  • Our customers have found value in using Probe42.in to enable their decisions involving identifying prospects, preparing for sales, analyzing credit and competitor, etc.
  • Please reach out to us if you need information on any of the ~ 1,118,000 companies in India
Disclaimer

Copyright© Probe Information Services Private Limited. This newsletter is intended solely for the addressed recipient and any dissemination, distribution, or copying of this will require permission from Probe. Probe has relied on estimates, analytics, and other public sources of information to prepare this report and is not liable for any damages in connection with the use of the information.

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Using Data for Corporate Lending

The retail lending space has changed rapidly over the past two decades, thanks to the use of data and technology. We are starting to see a similar transformation in the business lending space, through use of public data and automation. Based on the trends we have seen over the past six years, we believe that keeping the following in mind will help you get maximum mileage out of using data.

1) Measure the benefits

In most cases, there is an existing lending process. This process is done using an ‘old way’ (for want of a better term) of doing things. With the availability of data and with technology, the same process can be done more efficiently. The right way to approach the problem is to:

  • Measure the overall cost of the existing process (end-to-end cost)
  • See how the process can be changed using public data that was not available earlier
  • Gauge what the material change will be, in the overall cost of the process
  • Run a controlled prototype of the new process
  • Roll out the new process, if it makes sense

One of the challenges we see is that the approach to using ‘data’ is done tactically, without taking an integrated view of the whole process and the more significant implications.

2) SaaS model

In the new disruptive world (which, one has to admit, has made a significant change to the way we live our lives, all in just the past few years), you can use SaaS-based solutions to solve most pain points. The advantages of this model include:

  • Quicker trial and implementation: See benefits rapidly or move on if it doesn’t work out
  • Easy implementation: Does not require any significant upfront technological or financial commitments
  • Pay-as-you-go model

In a world where managers are used to conceptualizing large projects that consume a lot of time and require significant upfront investments, this approach is both critical and effective.

3) Structured vs unstructured data

There is much talk these days about AI, NLP, Machine Learning, etc. With social media and various other sources of information, the potential of unstructured data is enormous. By mining and using unstructured data mining to its potential, your process can go a long way in terms of efficiency and intuitiveness. In the process however, don’t lose sight of ‘good old structured’ information. After all, only a strong foundation of structured information can form the basis of unstructured information and analytics. Note that you can’t analyze without having good clean data in hand. Analysis without data is just an opinion.

4) Good data costs, but pays back quickly

In today’s world, led by the Internet and Google, one gets a lot of information freely. As a result, we do see a strong underlying mindset that all data is of ‘low value’. In reality, good quality data takes a lot of time to develop and money to build up. More importantly, having a foundation of useful quality data saves significant costs down the road. One would be surprised at the number of processes that exist out there, where the sole purpose is to capture and cleanse data. Instead, if good clean data had been available at the source, much of the downstream costs could have been saved. Build on a foundation of high-quality data, and the downstream benefits can be massive.

5) Keep an eye open for strategic advantages

In an industry that has been around and regulated for several decades, there are several outdated processes that have been adopted by too many people. Fear of questioning the status quo is high. Technology and data are changing things rapidly. What is even more interesting is that the regulatory system is also learning to question some of these outdated ‘requirements’, and is willing to adapt to things that benefit the end borrower (in this case, a business).

In 1995, who would have thought an individual borrower could get a loan in 30 seconds? This would not have been possible until the day someone believed ‘it can be done’.

Similarly, data and technology have started to throw up several options which question the status quo. If you understand the tools available (read data and technology), and approach it with the intent of benefiting end borrower — while bringing down overall costs, improving credit quality, and reducing cycle time – bold thinking can take you places.

The Uber, Swiggy, Paytm kind of disruptive ideas are not limited to just the B2C world. Lots can be done in the B2B world too.

Use Firmographics to Segment your Audience Effectively

Are you ready for the new era of sales?

Today customers are more informed than ever on the highly competitive banking sector. In this highly competitive state, what is most important is how different you are from any other salesperson. Therefore, knowing your prospect better than anyone else is the key differentiator.

Market segmentation and targeting is a widely accepted approach in today’s business world. Be it business to customer or business to business, correct segmentation is imperative to serve the market efficiently.

Firmographics are some identifying characteristics of a business that help to group it, along with other companies that have similar attributes, into a significant market segment, with .

Just like we use demographics to define people, firmographics does the same for companies.

Firmographics are very useful in outlining market segments. With a more in-depth understanding of market segments, sales and marketing teams can now plan their strategies more effectively.

Variables of Firmographics

  • Industry
  • Size
  • Business Location
  • Structure
  • Performance

Purpose of Firmographics

  • To know more about the firm, with regard to their business activities, market situation, and government regulations
  • To segment the market better — creating more logical business categories and enabling the development of products that align with the business’ requirements
  • To optimize marketing efforts and improve conversion rates
  • To maximize sales and minimize rejections caused by statutory irregularities and non-compliances
  • To gauge opportunities for growth and foresee hidden threats by understanding industry data trends and comparing it with different markets

Benefits of Firmographics

  • Hasten the sales cycle
  • Identify new opportunities
  • Understand what you need to offer
  • Improve productivity by better targeting
  • Boost marketing ROI

How Probe42 Helps

With Probe42, you can easily define your target markets with ease by:

  • Accessing firmographics of over 1 million active companies
  • Using powerful search filters to locate companies in your catchment area

Login now to explore your company of interest.