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Indonesian Regional Development Banks must embrace effective credit scoring mechanism to curtail NPAs

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Non-performing assets are not just a trail left by defaulting borrowers, it is indirectly linked with the inappropriate selection parameters and inefficient scoring mechanism of the credit scoring system of the banks. Mostly the credit scoring systems used in Regional Development banks act like a black box providing acceptable score for credit approvals to both good and bad customers. This could be due to multiple factors:


– Inappropriate parameters used for credit scoring

– Relying on few parameters that may not be sufficient to give an holistic picture of the customer

– Parameters that are static in nature and do not get impacted by sudden changes


Thereby, on and off the score remains the same for all customers and may result into a wrong decision.


Risk Management Priorities of Indonesian Banks


As per a report published by PWC, 39% of Indonesian Banks believe that Credit Risk is a major concern. Majority of the bankers believe that the enhancement in the loan monitoring system and approval process, as well as the limitation to exposures in certain industries will be key to ensure that appropriate credit risk management is achieved.


Evaluating a customer under the magnifying glass of credit score thus becomes an inevitable step while approving the loan. It is important from the bank’s perspective to assess the borrower effectively in order to receive regular repayments.




The big banks do have the provision of proper scoring mechanism. However, the smaller regional development banks do not seem to have an effective credit scoring system which results in an increase in the number of bad accounts. Majority of these regional banks depend on a manual credit appraisal process through applications such as an excel or have an in-house legacy system. These banks do not have any centralized credit scoring system. Moreover, there are banks that use separate credit scoring mechanism for different lines of business.


There is a considerable drive for change seen among these regional banks with the introduction of a new regulation that requires banks to direct at least 20% of their credit portfolio to the SME sector by 2018. This will give rise to increased competition to increase their profitability. Hence, there is a considerable need for these banks to adopt automation and better processes.


This is an opportunity where software solution vendors such as Nucleus Software can support these regional banks to leverage their IT capability in order to transform the bank’s business requirements towards assessing borrowers on credit score.


There is a high possibility that the other regional banks will follow similar technique of transformation once they find working with a proper credit scoring mechanism beneficial as these banks come under an umbrella group of ASBANDA banks with similar business requirements.


The success or failure of a bank would largely depend upon the quality of its advances. Before granting credit facilities, the bankers should satisfy themselves on the five Cs of Credit:


  1. Character – Past performance of the borrower is a good indicator of what can be expected of him in future
  2. Capacity – For business loans, the capacity or ability of the borrower for business is to be judged in light of his qualification, experience and leadership qualities
  3. Capital – It represents the stake of the owner in the business
  4. Collateral – A security cannot make a bad loan good but it definitely makes a good loan better
  5. Condition – Particularly in case of industrial advances, the condition of the country and position of the proposed borrower’s business in the industrial cycle at the time of credit request are of much importance


The benefits of an effective Credit appraisal system are countless:


– Proper credit scoring will facilitate banks in correct assessment of applicants to give out loans to those who have no/less chance of default

– Minimizes risk involved with the loan

– Increases confidence among the corporate bankers and improves sales decision

– Reduces NPA and possibility of financial loss

– Promptly identifies loans with potential credit weaknesses that could jeopardize repayment and appropriately grade or adversely classify them


For Regional Development Banks to gain a competitive advantage over other financial institutions, one of the ways is to reduce their bad accounts to the minimum level.


Nucleus Software’s FinnOne lending suite supports all types of lending with inbuilt credit appraisal system to take care of the entire borrower assessment offering immense value to banks in terms of growth and profitability.

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About the Author

Arup Das, Vice President and Lending Product Head (P&L Management)

Mr. Arup Das is the Vice President and Lending Product Head (P&L Management) at Nucleus Software where he is responsible for taking the flagship product to the next level of global leadership. Before joining Nucleus, he held a variety of roles in strategy and product management with leading companies including CISCO, IPValue and Mphasis.

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About Nucleus

At Nucleus Software we are committed to providing efficient, modern yet proven software solutions for the global Banking and Financial Service industry. We have been pioneers in developing Retail Banking Software, Corporate Banking Solutions, Transaction Banking, Cash Management and Internet Banking Software since 1986. Our success spreads across more than 50 countries, and we serve our customers globally through our direct and partner operations across US, Europe, Asia-Pacific, Africa and the Middle East. We are known for our world-class expertise and innovation in lending and transaction banking technology. Our two flagship products, built on the latest technology are: FinnOne™ and FinnAxia™.