StartupTalky

Tag: Lentra

  • The Future of AI in Risk Management for Financial Institutions

    This article has been contributed by Rangarajan Vasudevan, Chief Data Officer, Lentra.

    India’s financial sector, the driving force behind the nation’s economic progress, is dancing on a knife’s edge. Increasing regulatory scrutiny, geopolitical tensions, a volatile global economy, and the ever-looming specter of cyberattacks intertwine to form a complex and constantly shifting risk landscape. The gravity of this scenario is starkly illustrated by the fact that fraud in banking operations alone surged tenfold in 2021-22 compared to a decade ago, reaching an alarming INR 45,598 crore, as reported by the RBI.

    Effective risk management is the cornerstone of financial stability. It entails proactively identifying, assessing, and mitigating potential economic losses. Indian financial institutions (FIs) face a multitude of risks. Credit risk, a persistent concern, is exacerbated by the growth of the microfinance sector and the rising non-performing assets in Indian banks. Market risk, brought on by fluctuations in interest rates and stock prices, presents another challenge, as seen in the recent volatility in the Indian market. Operational risk, arising from internal failures like human error, technology glitches, or cyberattacks, is also a growing concern, especially in the digital age.

    The Reserve Bank of India (RBI) emphasises the need for strong cybersecurity measures to address this threat. In fact, the apex bank recently started placing limitations on various lenders citing concerns related to IT infrastructure and information security practices. Therefore, a failure to adhere to evolving regulatory standards necessitates continuous adaptation by FIs.

    Limitations of Legacy Systems
    Enter Artificial Intelligence
    How AI Can Revolutionise Risk Management
    Hurdles to AI Implementation
    The Future of Risk Management

    Limitations of Legacy Systems

    Traditionally, risk management in Indian FIs heavily relied on manual processes and historical data analysis. While this approach was sufficient in a less volatile environment, its inadequacies are now glaring. An ever-changing regulatory landscape in India, with new laws and regulations being introduced regularly, plus the growing interconnectedness of the global financial system, with transactions and investments spanning multiple countries, has added another layer of complexity.

    In addition, the unpredictable nature of natural disasters and pandemics, which can have far-reaching economic implications, further complicates risk management. Legacy systems cannot keep pace with the dynamic nature of risk today.

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    Enter Artificial Intelligence

    The limitations of traditional risk management have created fertile ground for AI’s transformative power. AI, alongside automation and cloud technologies, is poised to accelerate digital transformation in financial services. AI’s secret weapon? Its ability to sift through vast amounts of data from unconventional sources. Financial statements, market trends, social media sentiment, and even weather patterns all contribute to AI’s analytical capabilities. This allows for a far more comprehensive and nuanced understanding of risk, identifying potential threats that human analysts, reliant solely on historical data, might miss.

    Recent advancements in generative AI further emphasise this urgency. According to EY, modernising core functions and platforms is a top priority for banks aiming to expedite digital transformation, with 58% focusing on this area. Furthermore, 78% of Chief Risk Officers (CROs) prioritise AI implementation—a sign of the industry’s growing appetite for this technology.

    The benefits extend far beyond individual institutions. A joint study by National Business Research Institute and Narrative Science reveals that 32% of Indian financial service providers already leverage AI for tasks like voice recognition and predictive analytics. Major banks in India are actively employing AI to streamline operations, and a report by Accenture indicates that 83% of Indian bankers believe AI will collaborate with humans in the near future. JP Morgan Chase has developed the Contract Intelligence (COiN) platform, which can analyse legal documents in seconds, extracting key data points – a task that would take humans hundreds of thousands of hours. Not only is AI faster, but it is also demonstrably less prone to errors.

    AI’s reach is not limited to financial institutions. Regulatory bodies like the Reserve Bank of India can leverage AI to identify systemic risks within the Indian economic system. Real-time risk identification empowers regulators to take preventive measures, like adjusting interest rates, to enhance financial stability.

    Initiative Taken to Manage Implementation Risks of Generative AI By Organisations Worldwide as of 2024
    Initiative Taken to Manage Implementation Risks of Generative AI By Organisations Worldwide as of 2024

    How AI Can Revolutionise Risk Management

    AI’s impact on financial risk management goes beyond static risk estimation. By analysing historical data, AI can recommend dynamic portfolio diversification, proactively identify emerging threats, and adjust allocations to mitigate market risk. It can even simulate various economic and market scenarios to stress-test loan portfolios, helping institutions develop more resilient lending policies.

    Unlike traditional, static policies based on limited factors, AI and ML models can analyse every possible combination of variables, creating a powerful tool for credit managers. This allows them to simulate different policy settings and see the predicted impact on loan approvals. This data-driven approach empowers them to optimise conversion rates while minimising risk.

    The benefits extend beyond credit risk. Enterprises are leveraging generative AI as a virtual regulatory and policy expert. Trained on vast datasets of regulations, company policies, and guidelines, it can answer questions, identify compliance gaps in code, and automate regulatory checks – even providing alerts for potential breaches.

    However, with these advancements come policy considerations. Financial institutions must ensure the transparency of AI models’ decision-making processes to comply with regulations and maintain trust. Additionally, robust data governance practices are crucial to ensure the quality and security of the extensive datasets that power these robust AI systems.

    Hurdles to AI Implementation

    The potential of AI in financial risk management is undeniable. However, we need to address some key challenges to fully unlock this potential. One challenge is the constant game of catch-up regulators face. AI is evolving rapidly, and regulations often struggle to keep pace. This creates uncertainty for financial institutions and discourages broader adoption of AI in risk management.

    Another hurdle is the lack of standardised practices for developing and deploying AI systems. This inconsistency makes it difficult to ensure fairness, avoid bias, and most importantly, understand how AI reaches its conclusions. Without this transparency, trust is difficult to build.

    The financial sector itself faces its own set of challenges. The cost of acquiring, implementing, and maintaining sophisticated AI systems can be significant, especially for smaller institutions. Additionally, the effectiveness of AI hinges on high-quality data. Fragmented datasets and data privacy concerns can create significant roadblocks for institutions looking to leverage AI for risk management.

    The Future of Risk Management

    Despite these challenges and the ever-increasing volume of data, which presents a challenge for human analysis, it also creates a unique opportunity for AI’s implementation in India’s financial sector.

    Collaboration is crucial. Industry and regulators must work together to establish clear frameworks for responsible AI development and use in risk management. These frameworks should prioritise best practices, data governance, and Explainable AI (XAI) – tools that help us understand how AI models reach conclusions. This fosters trust and ensures ethical implementation.

    Despite AI’s automation capabilities, human expertise remains essential for interpreting results, making final decisions, and ensuring ethical applications. Therefore, upskilling the workforce becomes critical. Financial institutions must invest in training existing employees and attracting talent with AI, data science, and risk management expertise. This fosters a culture of human-AI collaboration, where AI amplifies human expertise while human oversight ensures responsible AI use.

    By embracing AI as a transformative tool in risk management, the Indian financial sector can navigate the complexities of modern finance with greater confidence. This shift paves the way for a more stable and secure financial future for all stakeholders – from individual depositors to credit-seeking businesses and the broader Indian economy.

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  • Lentra’s Ankur Handa Dives Deep into Digital Lending Trends and Challenges

    As the digital lending sector continues to witness remarkable growth and transformation, StartupTalky interacted with Mr. Ankur Handa, Co-Founder and President of Lentra, to discuss the challenges that the digital lending industry currently faces and how Lentra is actively addressing them. Mr. Handa also shed light on the key trends that are shaping the industry.

    Lentra, a prominent player in the digital lending arena, has been at the forefront of innovation, pioneering new strategies to maintain a competitive edge. From enhancing accessibility to ensuring data protection compliance, the interaction explored critical aspects of the industry’s growth and development.

    StartupTalky: Hello, I am Sayantan, and we are joined by Mr. Ankur Handa, Co-Founder and President of Lentra. Welcome to StartupTalky, Mr. Handa. How are you today?

    Mr. Handa: Very well, thank you so much for having me here.

    StartupTalky: It is a pleasure to have you here today. I am sure our audience is eager to learn more about Lentra and the digital lending market. Let us dive right in. What key trends do you see in the digital lending industry, and how is Lentra innovating to stay ahead?

    Mr. Handa: The lending technology landscape in India is undergoing significant transformation, particularly in the aftermath of the COVID-19 pandemic. One notable shift is the substantial growth in retail credit consumption, now surpassing commercial lending for the first time in history.

    What is most striking is the pluralism we see in our credit markets today. Credit is no longer limited to the salaried class or industrialists. It is now accessible to a diverse range of individuals, including street vendors, entrepreneurs, farmers, students, and homemakers. This expanded accessibility is largely attributed to initiatives like Jan Dhan Yojana, Aadhaar, and the widespread penetration of mobile internet. As we move towards a digitally connected world, this inclusivity becomes a significant equalizer for our diverse society.

    Another notable trend is the evolution of artificial intelligence (AI). AI is not only revolutionizing the way we assess creditworthiness but also changing the speed and scope of these assessments. It is enabling us to reach a broader customer base and customize services. One impactful application is leveraging business intelligence to address challenges related to accurately targeting potential customers. We are witnessing a shift towards a greater focus on “Government-to-Customer” (G2C) interactions, with initiatives like India Stack playing a pivotal role, particularly in sectors like agriculture and rural development.

    The decentralization of credit is another compelling trend. Initiatives like the Open Credit Enablement Network are standardizing the flow of credit among borrowers, lenders, and credit distributors. This move represents a democratization of financial services. As a certified TSP with Samadhi and Credit AI, Lentra leverages extensive cash flow data and a vast network of retailers to facilitate rapid underwriting.

    Additionally, co-lending is gaining traction, emphasizing customer-centricity and relationship management. There’s potential for non-banking financial companies (NBFCs) to collaborate with public sector banks, capitalizing on lower costs of funds to develop innovative business models.

    Lastly, the growing trend of “APIfication” is reshaping our industry. APIs (Application Programming Interfaces) are being integrated into various aspects of our operations. At Lentra, we have integrated our Lending APIs and Origination journeys with brands, OEMs, dealership chains, and merchant networks.

    StartupTalky: Thank you for sharing those trends, Mr. Handa. Now, moving on to challenges in the industry, what are the major challenges that the digital lending industry is currently grappling with, and how is Lentra tackling them?

    Mr Handa: One of the key challenges we face is accelerating our reach in a fast-growing market like India. We are not satisfied with a 7% growth rate; we aim for more. To achieve this, we need to revolutionize our digital distribution channels. Unlike in the past when we relied on physical branches, today, customers have numerous digital channels to access loan products.

    However, the challenge is tailoring these digital options to diverse customer segments. In rural areas, where a fancy website may not be practical, we need to use voice and other native digitization methods. For millennials and college students, a simple message or WhatsApp can complete the loan journey. Meanwhile, commercial lending to enterprises requires a different approach.

    The main challenge and opportunity lie in building robust digital distribution networks. Outside of that, as technology advances, security becomes a growing concern. With India’s growing economy, we anticipate a significant increase in security and fraud attacks by 2030. We must establish the right safeguards to protect our economy.

    In contrast, India excels in automation, insights, AI, collaboration with the ecosystem, and product innovation. These areas are not challenges but strengths for us, thanks to initiatives like India Stack. My focus is on addressing security and reimagining digital distribution as the top two long-term challenges.

    StartupTalky: All right. Since we have touched on distribution and security, so, my next questions revolve around these aspects. How is Lentra striving to enhance accessibility and inclusivity in digital lending, considering the diverse demographics? What strategies is Lentra employing in this regard?

    Mr. Handa: Our primary focus has been close collaboration with government initiatives. While terms like B2B and B2C are well-known, we have been forward-looking with a focus on G2C (Government-to-Customer). We have been early adopters of initiatives like Aadhaar, the Greater India Stack, eSign, and eKYC on our lending platform.

    We have also played a role in creating unique products. For example, we worked with a large bank to enable agricultural products like cattle finance loans and Kisan credit cards in just 90 days, benefiting rural farmers in Gujarat.

    There is a lot of innovation happening in response to government initiatives. The Account Aggregator, ONDC, OCEN, GeM Sahay, and related products are contributing to financial inclusion.

    Financial inclusion has come a long way. Credit card spending and personal loans are at all-time highs. However, we must ensure the sustainability of this credit growth and responsible lending practices. As a technology provider, we aim to support banks in lending responsibly to avoid repeating past mistakes, such as the 2007 crisis. The current NPA levels are at an all-time low of 3.9%, reflecting cleaner books.

    Financial inclusion is already happening, with a focus on retail products in both public and private sector banks. As a digital lending enabler, we are committed to creating new product offerings while maintaining sustainable models and robust underwriting, even when using alternate data and algorithms. Our goal is to avoid artificial growth bubbles.

    StartupTalky: Thank you for your insights, Mr. Handa. Now, moving on to data protection and security, considering the recent Digital Personal Data Protection Act, 2023, are there additional steps that Lentra needs to take to ensure compliance with the regulation once it is implemented?

    Mr. Handa: The key highlights from the Personal Data Protection Act are significant. The most notable aspect is the potential financial penalties, which can go up to 250 crore rupees for each instance of non-compliance. Data processing agreements are mandatory before outsourcing activities to third parties, even for Lentra, requiring scrutiny before using a solution.

    The Act also emphasizes periodic data protection impact assessments, mandatory for significant data fiduciaries. The impact assessment focuses on data, application, and infrastructure security, which must be designed for future challenges, not just current ones. India’s growing ecosystem means security threats will also increase.

    Details regarding the Act’s implementation may need clarification, likely after the establishment of the Data Protection Board of India, as outlined in the law. Lentra is actively discussing interpretations with banks and their risk teams.

    We have taken proactive steps to structure and process consent-based personal data sets for future adaptability. Data storage, encryption, and retention strategies will need reassessment and reimagination. This is an iterative but mandatory process to ensure data security for all Indians.

    Security is fundamental for Lentra, with compliance to ISO 27001, ISO 27018, ISO 22301, SOC 1, SOC 2, SOC 3, and AES 256-bit encryption already in place. As we gain more clarity, we will further reinforce and adapt these processes to the evolving ecosystem.

    StartupTalky: Since you mentioned the need for further clarification on government policies, especially regarding the Data Protection Act, do you have any specific recommendations for government policies that could better support the growth of Indian startups in general?

    Mr. Handa: Absolutely, there is more to be done. India has made significant strides in digital finance and payments, with UPI being a headline story. The scale, speed, and unit economics have amazed the world, and India is at the forefront of the fourth industrial revolution.

    The government can play a crucial role in two ways. Firstly, it can further accelerate the positive momentum within India. Secondly, it can help Indian companies, like ours, take their products to the global stage. Initiatives like expanding UPI to other countries are promising.

    As a private player, we are eager to take the Indian success story worldwide, but we need a conducive environment. Events like the G20 have been instrumental in promoting the Indian narrative on a global scale.

    On the home front, credit needs to be integrated into daily life. The government can encourage this by creating frameworks that enable affordability aspects of lending in various sectors like tourism, health, and education. We have the technology stack ready; now we need the right policy framework.

    We envision providing credit throughout a person’s life, from college to retirement, with various credit products offered by banks and other industries. This holistic approach can benefit individuals in rural areas and tier four and five cities. It is time to explore how we can make this a reality in India.

    StartupTalky: Mr. Handa, I have one more question, a bit hypothetical. Currently, commodity-based businesses use their commodities as collateral for loans. So, in this digital age, is it conceivable that companies might use data as collateral for securing credit in the near or distant future? What are your thoughts on this possibility?

    Mr. Handa: Today, I am in Delhi, where we hosted an event with friends from the banking fraternity. One interesting discussion point was a banker’s dream of creating an all-digital loan against property journeys with no paper involved. I believe this aspiration can become a reality.

    I see hope in the increasing digitization of daily life. From making payments through Google Pay to accessing documents in DigiLocker, these building blocks are aligning. It is conceivable that property purchases and land records could end up in a DigiLocker in the future, although this will involve complex security measures.

    India Stack has played a crucial role in this journey, starting with Aadhaar’s identity layer, and now expanding to consent and data layers, including account aggregators. As these layers evolve, they will trigger a chain reaction, although predicting the exact outcome is challenging.

    One thing is certain: there’s hope, belief, and the right tools, capabilities, and environment to make it happen. If this transformation occurs anywhere in the world, it will be in India. The next step is to create an environment for India’s success story to benefit other communities and countries, promoting inclusive growth and economic development.

    While we aim for growth and revenue with ethical practices at Lentra, the ultimate goal is to see both Lentra and India thrive economically.

    StartupTalky: As you rightly said, India has definitely made significant strides in digital payments and fintech, surpassing the West in many aspects. So, moving on to my final question, what is your outlook for the industry, and what advice do you have for budding entrepreneurs?

    Mr. Handa: I would say take a fearless leap. When I started Lentra with my partner, DV, we were in our fourth year, incubating this idea. I came from a corporate background, having worked at Capgemini and Barclays. It was a pivotal moment, and I am glad I took the chance. Some things cannot be meticulously planned; they unfold in unexpected ways.

    Facing challenges, patience, and persistence are crucial. We have adopted an iterative approach, not starting with a grand plan but having a vision and adapting along the way. We have made mistakes but also made more right decisions, which got us this far. We cannot become complacent; curiosity and a hunger for growth are essential.

    We are fortunate to thrive in India, where the ecosystem is expanding, attracting global giants like Apple and Google. Indian entrepreneurs have the opportunity to create localized solutions that cater to India’s unique needs. Opportunities surround us, and we should take the risk, have courage, and improvise. It is a conducive environment with ample support and resources available. So, my advice is to go for it.

    StartupTalky: Thank you, Mr. Handa, for sharing your valuable insights. I have learned a lot, and I am sure our audience has too. We appreciate your time, and we look forward to future interactions whenever the opportunity arises.

    Mr. Handa: My pleasure. Thank you so much for having me. It has been a pleasure interacting with you.

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