Top 10 KPIs to Measure the Efficiency of Loan Origination Process

Introduction

Loan origination is like a crazy rollercoaster ride for financial institutions, with twists and turns from application processing to loan disbursal. To make sure they don’t lose their lunch, financial institutions use loan origination systems that streamline the process, cut costs, and make customers feel like they’re riding the kiddie coaster. But to really take their ride to the next level, they need to track Key Performance Indicators (KPIs). These metrics are like the seatbelt that keeps them safe and helps them evaluate their performance, spot problems, and make informed decisions. By tracking KPIs, they can make their loan origination system run like a well-oiled machine and avoid any derailments. In this blog post, we’ll take a wild ride through the top KPIs that financial institutions need to measure to optimize their loan origination systems. We’ll explain why each KPI is important, how to measure it, and how to keep your customers from feeling like they’re on a crazy coaster ride. Whether you’re a financial institution looking to optimize your loan origination system (LOS) or a borrower hoping to avoid any bumps and bruises, this post will give you the inside track on the KPIs that drive loan origination system performance.

Key Performance Indicators (KPIs) for Loan Origination System

A. Average Cycle Time

Financial institutions can optimize their loan origination process using the powerful metric of average cycle time KPI.

This KPI is typically calculated by

Average Cycle Time = Sum of Days Between Loan Application To Loan Disbursements For All Loans / Number of Loans Disbursed During Same Period

When measuring this KPI, 2 factors are taken into consideration:

the time from when the borrower logs into the lender’s app to loan disbursement, and
the time from when the borrower submits important documents to loan disbursement.

However, the true measurement of this KPI begins with the second consideration.

For instance, if a borrower logs into a lender’s app to apply for a personal loan of INR 1,00,000 and submits their documents for the application, the average cycle time would be measured from the submission of the documents to the loan disbursement for loans disbursed by the lender.

It is important to note that the KPI will start when the borrower submits his documents and convert his login into a genuine application against the number of loans disbursed by the lender, which becomes the critical point for any loan application.

B. Pull-Through Rate

The pull-through rate KPI is a crucial metric that gauges the level of maturity in a lender’s loan origination system.

Typically, this KPI is calculated by

Pull-Through Rate = Number of Loans Disbursed / Number of Loan Applications Submitted During Same Period

However, it’s important to note that this calculation only considers valid applications that match the lender’s Ideal Customer Profile.

For instance, if a lender offers loans only in Chennai, a loan application from Delhi will be rejected outright. On the other hand, if a borrower from Chennai applies for a loan but gets rejected for some other reason later, their application will still be counted as valid.

This KPI offers a bird’s eye view of a lender’s overall performance, touching on various aspects such as the efficiency of their workflow, the quality of applications received, the level of customer service provided, how competitive their interest rates are, and how closely they align with their ideal customer profile.

C. Bucketed Loan Value

The bucketed loan value KPI serves as a key performance indicator that sheds light on a lending business’s loan profitability.

This metric allows financial institutions to analyze the flow of loan volume and identify where the real money is being made.

To calculate this KPI,

Bucketed Loan Value = Total Volume of Loan Originated / Number of Loans Disbursed During Same Period

For example, if a rural city disbursed INR 6 Cr in loans over 200 loan applications in 6 months, the bucketed loan value would be INR 3,00,000.

Lending businesses typically have a value target for each year, and during festive, wedding, or holiday seasons, the average loan value tends to increase. Lenders often take advantage of these periods to boost their average loan value and reach their value target for the year.

D. Cost Per Unit Originated

The Cost Per Unit Originated (CPUO) KPI measures the efficiency of a lending business on an individual level.

It is calculated by

Cost Per Unit Originated = Total Expenses Incurred / Number of Loans Disbursed During Same Period

For instance, a loan officer’s expenses like mobile bills, travel, salary, and incentives are divided by the number of loans he or she provides in a year without any defaults.

The KPI is also particularly useful for larger organizations, where it may be calculated only for top-level executives. For example, a CEO overseeing 20 loan officers would need to calculate the CPUO based on the expenses of all 20 loan officers, in addition to their own salary, phone bill, travel, branch infrastructure expenses, branding, and sales. By utilizing a Loan Origination System, a CEO of an NBFC can reduce the CPOU since all loan origination activities are handled by the system.

E. Application Approval Rate

The KPI that gauges client acquisition and loan application workflow for a lender is the application approval rate.

This metric is calculated by

Application Approval Rate = Number of Approved Applications / Number of Valid Applications Submitted in that Same Period

A low application approval rate may signify issues in document gathering and application review processes or a gap in your ideal customer profile resulting in an influx of unqualified borrower applications. A low approval rate is a warning sign that your operation is wasting precious time and money on fruitless applications.

These metrics are regarded as providing detailed feedback rather than a holistic view. With one exception, they are intended to examine deeper or more specific aspects of the loan origination process.

F. Cycle Stage Length

The Key Performance Indicator (KPI) for cycle stage length measures

Cycle Stage Length = Sum of Days In Each Loan Origination Stage for All Loans / Number of Loans Disbursed in that Same Period

This KPI is similar to the average cycle time KPI mentioned earlier, but it focuses on the specific stages of each loan’s origination process, providing a more detailed analysis of their effectiveness.

For instance, consider a 5-stage loan origination process. Timeframe = 6 months, number of loans disbursed = 3. If you want to calculate the cycle stage length for document submission (takes 2 days for each loan) stage alone, it will be 2. Similarly, you can calculate cycle stage length for other stages also.

By closely monitoring the cycle stage length, negative changes in different segments of the loan origination process can be identified quickly when the average cycle time is high or increasing. This helps to diagnose and resolve problematic processes more efficiently.

G. Profit Per Loan

The profit per loan KPI evaluates a lender’s profit for each loan by

Profit Per Loan = (Total Revenue – Total Expense) / Number of Loans Disbursed in that Same Period

However, it’s worth noting that only 20% of the total expenses are typically considered when calculating this KPI in a real-world scenario.

There could be several reasons why a lender may have a low profit per loan, such as a high cost per unit originated, which cancels out revenue, or a low average loan value, resulting in insufficient revenue. Thus, while the loan volume/value KPI may receive more attention, profit per loan is a crucial metric for evaluating the financial performance of a lending operation.

This is the KPI that should always be taken into consideration during evaluations and decision-making.

H. Abandoned Loan Rate

The abandoned loan rate KPI can highlight several potential issues in the loan application process. This KPI measures

Abandoned Loan Rate = Number of Approved Loans Not Disbursed / Number of Applications Approved in that Same Period

It’s worth noting that this KPI takes two scenarios into account for the number of applications not disbursed:

Pre-Loan Product Offer – from the critical point of a loan application to the abandonment point
Post-Loan Product Offer to the abandonment point.

Therefore, this KPI forces lenders to investigate why a qualified and approved borrower would choose to abandon their loan.

I. Incomplete Application Rate

Assessing the rate of incomplete applications is a valuable way to gain insights into a lender’s workflow for application and loan processing.

This KPI is calculated by

Incomplete Application Rate = Number of Applications Closed due to Incompleteness / Number of Applications Received in that Same Period

This ratio can help identify areas where the loan origination process could be made more efficient.

This KPI is crucial in identifying bottlenecks within the loan origination process. It is measured stage-by-stage, allowing for the identification of specific stages where issues arise and why borrowers may abandon their applications, resulting in incompleteness.

For instance, if the underwriting stage requires the borrower to upload bank statements through the app, they should have the option to access their net banking directly and upload the documents. Similarly, if a picture needs to be uploaded, the borrower should be able to access their folder directly and upload it. The goal is to ensure a smooth experience for the borrower throughout the process and minimize the chances of them abandoning their application.

Therefore, this KPI is a measure of the effectiveness of the borrower’s experience during the loan origination process and can help streamline stages by removing bottlenecks.

J. Customer Acquisition Cost (CAC)

The KPI for customer acquisition cost examines the cost of obtaining a customer relative to their lifetime value to the company. This KPI is generally measured for top executives’ level.

This metric is calculated by

Customer Acquisition Cost (CAC) = Total Sales and Marketing Cost / Number of New Customers

It’s important to note that the CAC rate doesn’t factor in existing customers who are obtaining another loan from the same lender. It rather concentrates on taking new borrowers into account.

Paying back a loan can be a real drag, but financial institutions such as banks, NBFCs and fintechs are working hard to make the process smoother than a buttered slide. By keeping tabs on these fancy KPIs, they can fine-tune their loan origination systems and give you an experience that’ll make your customers feel like VIPs. And who doesn’t want that? So sit back, relax, and let the KPIs do their thing while letting your borrowers enjoy a stress-free loan application process.

Conclusion

A symphony of success for financial institutions hinges on the efficiency of their loan origination systems. The sweet sound of improvement can only be heard when the right key performance indicators (KPIs) are measured. These metrics serve as a tuning fork, helping institutions understand and refine their loan origination process. By tracking the KPIs mentioned above, institutions can hit all the right notes, creating a harmonious experience for their customers and a crescendo of profitability. Loan origination software, like CloudBankin, serves as the conductor, ensuring that all the instruments are in tune and the symphony is executed flawlessly. And with the loan origination software market to surpass approximately USD 9544 million by 2030, financial institutions can look a long way to play a standing ovation-worthy performance with data-driven decisions and continuous improvement.

Frequently Asked Questions

What is loan origination system for banks?

In the world of finance, Loan Origination Systems (LOS) are the go-to software solutions for automating and managing the loan onboarding process. This multifaceted process includes loan application, underwriting, approval, till disbursement. The leading LOS systems, such as CloudBankin, offer a wide range of features that improve the efficiency, accuracy, and compliance of loan operations, including digital onboarding of loan applications, faster decision using credit decision engine, and API integration to automate the entire loan origination process. By using an LOS, financial institutions stand to reap several benefits: a) An LOS can significantly reduce the risk of compliance issues of KYC by ensuring that all necessary information is complete and accurate. b) An LOS can streamline document generation, data entry, and workflow management, boosting productivity, automating repetitive tasks, and reducing manual errors. c) An LOS can enhance customer satisfaction by providing fast and transparent loan decisions, along with online applications and self-service options. d) An LOS can unlock revenue potential by enabling cross-selling, upselling, and pricing optimization, allowing financial institions to capture more market share and retain existing customers. e) An LOS can improve risk assessment and mitigation by utilizing data-driven models, analytics, and scoring engines.

Why do we need loan origination system?

An NBFC uses a complete loan lifecycle management software which includes: Loan origination systems are indispensable allies in the lending business, empowering financial institutions to elevate their efficiency, quality, and profitability. Here's why: a) By automating data collection, document verification, underwriting, and decision-making, loan origination systems can save valuable time and reduce errors. b) Integration with third-party services, such as credit bureaus, payment gateways, and more, equips loan origination systems with superior data accuracy and security. c) With online application and self-service options for customers, loan origination systems enhance customer satisfaction and retention. d) Loan origination systems optimize pricing, cross-selling, and upselling strategies, boosting revenue and market share. e) Using data-driven system, analytics and rule engine, loan origination systems enhances risk assessment and mitigation. f) A comprehensive reporting provide with invaluable insights to lenders. All things considered, lenders who prioritize loan origination systems unlock endless potential to deliver value to their customers and stakeholders.2. Loan management system to cover the complete servicing to the customers including repayment tracking, NPA management, rescheduling of loans and closure. 3. Accounting management system with functionalities including journal entries (automated or manual), cash or accrual based double entry accounting, integrated chart of accounts, automated tax configurations. 4. Reporting and Dashboards to showcase any data with real-time reports. This helps in keeping track of important key metrics and provide quicker and better informed decision making.

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05 Oct