Broadly speaking Loan lifecycle can be broken in two parts pre-disbursal and post-disbursal. The blue shaded boxes or the boxes in the first row in the picture above are part of Pre-disbursal. The yellow shaded boxes or the boxes in the second row in the above picture are part of Post-disbursal. Note, Loan Disbursal phase in terms of systems implementation are part of Post-disbursal systems usually, though some duplicate it in Pre-disbursal system too.
Attempting to cover all use-cases, a Loan would have about 14 phases in its life-cycle. Unsecured loans, for instance might not have blocks like Loan Utilization phase mentioned above. Some NBFCs offering unsecured loans might not allow for Loan Modification/Restructuring and this phase becomes redundant there. So your use-case might vary, but what is important is that the product team has a higher level picture of the domain and phases of its operation in a visual representation like this.
Optimistically stating, 8 on 10 startups don't even have a big picture documentation like this for they have grossly overlooked the importance of shared understanding across board. And invariable in every place that I have walked-in so far, I try to work with my product counterparts to have something like this in place to democratize domain knowledge for the good of the business.
The Engineering Leadership at helm overlooking this is another gotcha to be polite. It always makes me wonder "how the domain modeling is done?", "how the architecture is conceived?" (especially the microservices architecture that the engineering leadership often boasts of), "taking this use-case in India, how the systems comply to the DLG guidelines set-up for RBI in India?" and on and on. If you are an engineering head reading this, I encourage you to have this in place and see for yourself how the team get better in their delivery.
Simplifying the complexity is hard but the joy lies in that. So let me walk you through the different phases in a loan life-cycle.
- Loan Application : The applicant submits a loan application to the bank or NBFC, providing personal information, employment details, income proof, and other required documentation. The application may be submitted online, through a mobile app, or in person at a branch.
- Document Verification : The financial institution verifies the authenticity of the documents submitted by the applicant, such as identity proof, address proof, income documents, bank statements, and employment verification. This step ensures that the applicant meets the eligibility criteria and provides accurate information. This phase includes KYC and AML.
- Credit Evaluation : The fintech evaluates the creditworthiness of the applicant. This involves analyzing the applicant's credit history, credit score, existing debts, repayment behavior, and other factors to assess the risk associated with lending to the individual. The fintech may also consider factors like employment stability, industry sector, and repayment capacity.
- Loan Appraisal : In this step, the financial institution like bank/NBFC assesses the loan application in detail. It involves analyzing the applicant's financial statements, business plans (in case of business loans), collateral (if applicable), and other relevant factors to determine the loan amount, interest rate, and terms and conditions that can be offered. The financial institution might have different policies for different use-cases defined by its Risk Analysts.
- Loan Approval : Once the loan application and the applicant's creditworthiness have been evaluated, the financial institution makes a decision regarding loan approval. If approved, the financial institution specifies the approved loan amount, interest rate, repayment schedule, and other terms. The applicant is provided with a loan offer or loan sanction letter.
- Documentation & Agreement : The Bank / NBFC prepares the loan agreement, which includes all the terms and conditions of the loan. The applicant is required to sign the agreement, acknowledging the terms, repayment obligations, and consequences of default. The applicant may also be required to provide additional post-dated cheques or setup auto-debit facilities for EMI payments.
- Loan Disbursal : After the loan agreement is signed, the financial institution disburses the loan amount to the applicant. The disbursement can be made through various channels, such as direct bank transfer, check, or demand draft. The financial institution may deduct any applicable processing fees or administrative charges from the loan amount.
- Loan Utilization : Is the borrower using the loan amount for the intended purpose? This is typically tracked and noted by the lender through various methods and mechanisms like collateral evaluation, site visits or inspections, communications & follow-ups etc.
- Loan Repayment : Is the borrower repaying the loan amount as per the agreed-upon schedule? Are reminder notifications sent at appropriate time to aid the borrower be their super customer.
- Loan Servicing : Once the loan is disbursed, the bank / NBFC monitors the loan account and ensures regular repayment by the borrower. This includes sending periodic statements, managing EMI payments, addressing customer queries, and providing customer support throughout the loan tenure.
- Prepayment / Foreclosure : The facility for a borrower to prepay the loan partially or in full before the scheduled tenure.
- Loan Modification / Restructuring : In certain situations, the borrower may request loan modification or restructuring. In other situations, the financial institutions may offer the same to a borrower as part of their marketing campaign.
- Collections and Loan Defaults : If the borrower fails to repay, the lender initiates collections activities to recover the outstanding amount.
- Loan Closure : Once the loan is fully repaid, the loan account is closed.
Again, your use-case might vary depending on your context. But it is crucial that you put that in writing with some visual representation and explanation text like this blog post to ensure that across the org you have a shared understanding of the domain and its jargons. Some start-ups for instance combines loan repayments and collections together and some combine loan repayment and loan servicing together. Also, phases like Document Verification, Credit Evaluation and Loan Appraisal can be combined together as Under-writing. These concepts are important to be understood at different levels of abstractions, by all players in the team.
Typically, Pre-disbursal phases are managed by Loan Origination System (LOS) and Post-disbursal phases are managed by Loan Management System (LMS). There could be separate systems like Risk Management System (RMS) for Under-writing teams, and Collections Management System (CMS) for Collections team. Systems are architected based on the needs and structure of the organization and so it is critical for Engineering Leadership to understand how things work in the context of the organization and work with various stakeholders for alignment. Are you doing this?
Take the pains to document your business domain like this so that your teams and business don't suffer burn-out or exhaustion. Remember, pain is inevitable but not suffering.