Should I lend to this customer? A guide to risk assessment

For any lending business to be profitable, a lender must be assured of recovering their loan. At its core, the lending industry is built on the trust that borrowers will fulfill their obligations and repay the funds borrowed. However, that never seems to be the case, as Nigerians are known to have a strange attitude towards debt.

When we think back to 2015, the Federal Government initiated the Anchor Borrowers Programme (ABP) to provide loans to struggling farmers. We see how repayment eventually became a challenge, with just 200 out of 70,000 Kebbi State farmers settling their debts. 

In consumer lending, the same bodes true. Nigerians are never keen on loan repayment, so financial difficulties become a given when these lenders transact with many non-paying borrowers.

Lenders who choose Lendsqr, however, have no problem getting their money back, as they have access to numerous insights and tools to aid in building Risk Acceptance Criteria (RAC) unique to their market and their specific business model.

And so we’d like to reiterate once more that there is no one-size-fits-all solution for lenders in handling borrowers; different methods work for different target markets. Strategies that work wonders for a large, general consumer market may not have a similar impact when dealing with a small and medium-sized enterprise (SME) market. The first step in making informed lending decisions is understanding your market – Who are your customers?

Here are a few practical guides on how to determine if you should lend to a borrower or not. Let us help you reduce the chances of your business dying from unpaid loans. 

Review credit reports 

No matter how simplistic and obvious this step may seem, you must never fail to overlook the review of a prospective borrower’s credit history. Begin by obtaining a borrower’s credit report from reputable credit bureaus such as CRC, FirstCentral, CreditRegistry and others to provide an extra layer of protection for your lending decision. Read more on how you can use multiple bureaus to double your protection. 

Once you see loan defaults, too many loans over a short period, or too many inquiries in recent times, just RUN! 

Corroborate claims on a phone call

Identity theft is a menace and many have been caught taking loans with someone else’s information. But even more common would be borrowers garnishing their data and track records. That’s why a first-time phone call is necessary to ensure prospective borrowers are “who they say they are” and not trying to play a fast one on you. A big red flag you must never overlook is an unreachable phone number – If i can’t find you now, I won’t find you later. 

When you successfully get on a call with a borrower, we strongly advise that you corroborate the data they provided digitally. Deliberately make a mess of saying their surname, place of work or age and note their response; do they immediately chastise you or go along with the error? The latter shows they’re sketchy and high-risk, so you must retreat with alacrity!

Mandatory ID upload and facial recognition  

Identity theft is one of the negative smears in the lending industry that portrays loans in a bad light. As a digital lender, being hoodwinked by a fraudster posing as someone else is something you want to avoid at all costs. 

Before you approve that loan request, ensure that borrowers submit correct, approved and up-to-date forms of identification with data that correlates across various platforms. Bank Verification Number (BVN) and National Identity Number (NIN) are two of the most substantial means of identification in Nigeria. With the BVN, you are assured of the user’s identity and financial health status across banks, credit bureaus and other financial services.  

Lendsqr lenders have the added advantage of implementing facial recognition as a part of their Know Your Customer (KYC) process. The images on the ID, NIN, and other identity documents are automatically cross referenced against customer real-time images. This way, they’re double-protected and can significantly reduce the risk of being scammed by identity fraudsters and maintain the integrity of their lending business. 

Review and corroborate work information 

There is no harm in being extra cautious, especially in today’s world, where many individuals tell white lies about their earning capacity. You must ensure that your borrowers are employed and earning where they claim they are. This step is especially important if your target market falls within the working class bracket.

Verify the legitimacy of the company they are associated with, as there are unfortunately numerous phony companies and just as many career grifters out there. You can verify their claims by confirming the company’s address (an impromptu visit to the location may be necessary, depending on the type and size of the loan), the individual’s specific job role, and the company’s authenticity.

Bank statement

A dying man may promise you the world, but a promise like that cannot be kept. As a lender, you do yourself a disservice by lending money to someone solely on their promises (remember, you’re not a charity organization). Take the time to verify and thoroughly examine their bank statements to ensure you are making an informed decision. Don’t just take their word for it; confirm and review borrowers’ bank statements ethically and legally. You can turn to trustworthy organizations like Lendsqr, Mono, or mybankStatement. 

Round-tripping 

Stay alert for signs of “round-tripping,” a practice where an account briefly holds a substantial sum of money and promptly transfers it to another account. This action effectively turns the account into a conduit, potentially concealing the account holder’s true financial status or involvement in questionable financial activities.

As a lender trying not to get ripped off, this pattern should raise a red flag, prompting a more profound inquiry to ensure your lending decisions are made with a clear understanding of the borrower’s financial standing. In other words, if it appears fishy and smells fishy, it’s most likely fish.

Onsite assessment

Who doesn’t love “Surprise! I knew you wouldn’t want me to be here, but I came anyway” visits? Definitely someone who has something to hide. This risk assessment is an approach we’d very much recommend for lenders whose target market is SMEs. To rule out discrepancies, send a representative to show up unannounced at their business location.

During this unannounced visit, your representative confirms the business’s existence, assesses how much income it generates, and ensures that the data provided digitally tallies with what is seen onsite. Once it’s certain that everything checks out, you can make an informed lending decision about this borrower.

Screen guarantors and collaterals

When approving a guarantor, the central concern lies in whether the guarantor can vouch for the repayment being made on schedule. This is why it’s important to thoroughly screen and verify the earning capacity of a guarantor before loan approval.  

Precautions are necessary when lending a large amount of money to a client with a “woe betide me” credit history. One way to protect yourself as a lender is to ask the borrower to provide something valuable, like a car or home property, as collateral. But, this only works if you’ve checked that the borrower’s collateral belongs to them and that it’s valuable enough to cover the loan if they are unable to pay.

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Despite how fantastic these practical guides are, we understand the challenges of integrating these processes without a centralized system in place. That’s precisely why Lendsqr takes care of all the heavy lifting for you, offering the right technology to help you create Risk Acceptance Criteria (RAC) that are unique to your target market.