Credit underwriting software analyses a business borrower or a home-loan borrower and drafts the credit memo, the note in which the underwriter explains why a loan should be approved or refused. In Indian banks, this note is usually called the credit appraisal memo (CAM). An underwriter is the credit expert who studies a loan application and recommends a decision.
For a small personal loan, a credit decision engine can decide in seconds. A business loan of several crore is different. The underwriter must read the company's financial statements for three years, its GST returns, its bank statements, its loans with other banks and its largest customers. She must then write a memo of 20 or 30 pages for the credit committee, the group of senior bank staff who approve large loans. Writing it by hand can take a week or more.
Credit underwriting software does the reading and the first draft. Imagine a bank in Mangaluru that receives an application for a ₹4 crore working-capital loan from a seafood exporter. The software reads the exporter's financial statements and calculates the key ratios. One of them is the debt service coverage ratio (DSCR), which compares the cash the business earns with the loan repayments it must make. A DSCR of 1.4 means that the business earns ₹1.40 for every ₹1 it must repay. The software also reads the results of bank statement analysis. It checks whether the sales in the GST returns match the money arriving in the bank, and it finds any loan that was repaid late.
The software then drafts the memo. The memo describes the business, the ratios, the risks and a recommendation. Each number refers to the document it came from. The underwriter reads the draft, checks the figures she doubts and adds her own judgement. Then the credit committee decides. This way of working is called human in the loop: the software drafts, and people decide.
The software is used mainly for MSME loans, larger business loans and home loans. After a home loan is approved and paid out, it moves to mortgage servicing software, which collects the repayments for many years. The general practice behind all of this is underwriting: judging a risk before taking it on.