Table of contents
In part I of our three-part series ‘All things BRE’, we discussed what a Business Rules Engine (BRE) is and touched upon the need to separate ‘business rules’ from the application code. In this blog, we shall find out how a more agile BRE takes the lending game to a whole new level.
A bespoke BRE
In part I, we saw how a lending workflow that embeds business logic causes process rigidity — a major pain-point felt across the industry. The solution? Externalising business logic away from the source code.
A systematic approach to business rules management delivers a boost to business agility and productivity while offering significant cost savings. To produce a certain outcome, why define a whole new workflow when you can achieve it faster by simply tinkering a few rules.
With a modern BRE that treats business rules as a resource in itself, one can:
Add, delete, or modify a rule, instantly
Trace back an undesirable outcome to a specific rule or rules, with ease
Reduce turnaround time and improve process efficiency
Eliminate data errors and ensure accuracy, cleanness, and completeness of the dataset through data validation
Explore 'what if' questions and scenarios to optimise or devise lending policies.
Get rule-level insights on how it behaves in respective demographics
Evaluate a user in accordance with multiple lending policies, before providing a final decision
Benchmark one rule set against multiple others to identify which policy works best
Why lenders need a smarter BRE
The global economy is constantly upended by crises — from pandemics and financial crises to inflationary pressures and technology & social movements — thereby thrusting upon Chief Risk Officers (CROs) the onus of ensuring business continuity. Contending with persistent and dynamic disruption has become a fact of life for CROs of financial services companies.
To better understand the magnitude of the challenge CROs face and the resilience a BRE offers, let’s consider the following scenarios.
Interest rate risk is fundamental to the business of banking. And recently RBI has been on a rate hike spree — a 140 basis points increase in just four months — jolting banks out of their four-year long comfort zone of an unchanged 4% repo rate.
Such a rising rate environment combined with flattening yield curve as has been the case since June 2022, is basically ‘interest rate risk’ entering the danger zone.
Curiously, state-owned lenders raised the MCLR (Marginal Cost of Funds-based Lending Rate) only a month after the third RBI rate hike, according to Business Standard.
Why such a delay?
Makes one wonder whether it’s because of operational difficulties or a deliberate business decision. Currently, banks price loans based largely on the cost of their deposits. Therefore a delay in passing on the rates cannot be definitively attributed to operational inflexibility — yet the fact remains that operational lead time is a major barrier to monetary transmission.
However, the case of NBFCs is quite different — their borrowing costs have risen proportionately to the repo rate hike. If NBFCs face delay in effecting changes in the business rules that govern decision-making (in this case revised interest rate), then it can affect their net earnings adversely.
Whether it is banks or NBFCs — one thing is clear — the need to be agile. But for agility to be a realistic feature of modern businesses — the lending processes should become inherently flexible. To build resilient lending process models, the underlying ‘business rules’ that govern them should become flexible. After all, it is business rules that trigger actions that cumulate into a process.
The key to achieving agility lies in treating business rules distinctly from business processes — exactly what a BRE does.
CROs must deal with not just what’s happening but also what may be about to. For example, RBI’s current stance on First Loss Default Guarantee (FLDG) points to the imminent death of FLDG agreements. This is likely to turn current lender-fintech partnerships on its head, requiring lenders to amend and redeploy their lending policies.
But how do you amend a policy when you don’t know what amendments will work? Shots in the dark can end up becoming costly mistakes. Only if credit risk teams had the kind of simulators aviation students do. In a simulated flight, you have the freedom to make mistakes that might be impossible to survive in the ‘real world’. Similarly, a smart BRE can also offer risk teams the benefits of a simulator to practise, identify, assess, and mitigate risk.
The one risk issue that garnered maximum CRO attention in the last 12 months was credit risk, according to EY. This is not surprising, considering the economic upheaval caused by the pandemic. The most touted solution for this is data-led credit risk modelling, and rightly so. But what use is knowing the likelihood of default unless lending policies can respond to it at speed? This is where BREs shine. They dramatically shorten the time it takes users to make changes — from months to a matter of minutes.
Financial inclusion is no longer just a welfare goal but a major growth opportunity — thanks to alternative data and cost-effective tech-enabled distribution. Put simply, embracing risk is the new growth strategy (our whitepaper explores this in great detail). Whether you want to expand to new user bases, say new-to-credit customer cohorts, or leverage risk-based pricing — the ability to optimise your lending policy becomes crucial. With a BRE, risk teams can do this instantaneously without touching the code. Besides cutting dependency on development teams, a functionality-rich BRE can add one more incredible advantage — eliminate human error.
Mind you, eliminate, not just reduce. How? It’s called validation. Typically, you run the risk of basing decisions on incomplete rule sets that may not accurately or fully represent the situation at hand. Such lacunae in policy formulation can be solved at the validation step.
BREs can empower financial institutions to streamline important decision-making processes involved in lending, as shown in the figure below.
Risk leaders are realising that they can do more and do better with smarter decisioning systems enriched with alternate data. Additionally, BRE has the power to restore full control over lending activity with core teams of financial institutions. More importantly, it’s the door to agility.
This blog is the second part of our three-part series ‘All things BRE’. In Part I, we discussed what a BRE is, and in this blog (Part II) why you need an agile BRE. Watch out for Part III to know all about how FinBox is approaching this challenge.