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Home / Money / Calculators /  Will credit scores matter for all loans?

A few banks have started giving preferential pricing on loans to consumers with a good credit score. Shaikh Zoaib Saleem asks experts whether this can become a norm for all retail loans.

Virendra Sethi, Deputy General Manager, Mortgages, Bank of Baroda

Clear pricing brings in transparency.

We started giving discounted pricing based on the bureau score of the applicant since April 2016. Only few banks are providing such benefit. Some banks offer a discounted price up to their MCLR (marginal cost of lending rate) on their card rates to select customers. In such cases, the applicant has to bargain to get a lower rate on card rates. 

To implement risk-based pricing, we analysed our delinquency data. The delinquency rate was only 0.07% of the accounts having a credit score above 760, while 0.35% delinquency was seen in accounts with a score below 760.

 Also, around 19% of our loan customers had a score of less than 725 before April 2016. After we launched risk-based pricing, this share has come down to only 1%. Before April 2016, our sourcing for customers with a score above 760 was 31%, which is now up at 56%. At present, we are offering risk-based pricing in all retail loans, except education loans. 

Risk associated with a customer goes down with a good credit score. Clear pricing brings transparency.

Jorty Chacko, Executive Director, IDBI Bank

Customers with low risk to get low rates.

There is no clear answer on why this type of risk-based pricing started only recently. But what needs to be noted is that things have been improving over time and banks have been focussing on credit discipline of borrowers and chasing customers with a good credit score. This is why it is becoming more pronounced now. Also, public sector banks are competing with private sector banks for the retail lending space. 

What we are trying to do is give an instant discount on the card rate of a loan to a disciplined customer. I think this will be an instant gratification to the customer. That is the philosophy behind this move. This offering is only applicable to home loans and I think this will further give a boost to our retail lending. But this is the first step in the risk-based lending direction. Anyway credit score is a vital parameter to look at while giving a loan, so we are thinking about personal loans as well. 

It will become a norm across the industry in some time. Ultimately, a customer with low risk will get low rate of interest.

Arun Ramamurthy, Director, Credit Sudhaar

Risk-based lending is a global reality.

Risk-based pricing is a reality across the globe. Lending institutions offer better terms to customers with good credit score and would charge a higher rate on trade lines that carry a higher risk to mitigate the probable losses. In fact, the Reserve Bank of India in the past has issued a notification that suggests banks to levy interest based on the associated risk. Eventually, all lending institutions should be extending risk- based pricing to retail customers. 

Borrowers with a good credit profile get significant benefit since while generally there is no direct correlation between the interest rate and credit score, interest range is a reality even now. For example, an unsecured personal loan interest can vary from 12% to 24%. Consumers are today far more informed. The awareness on maintaining a good credit profile is helping them negotiate lower rates. If a person is able to secure a loan with a lower rate of interest, it will result in a large saving. Even a small change of about 50 basis points can lead to substantial restraint on interest being paid. 

Rajiv Raj, co-founder and director, CreditVidya

Large banks need to take the lead.

Risk-based pricing is yet to be adopted in a full-fledged manner in India. We have only seen this phenomenon for home loans offered by a few banks. Here, lenders are looking at getting good profiles by providing them a discount of 25-50 basis points on rack rates.

Banks and non-banking financial companies (NBFCs) have been giving special rates for salaried borrowers working with category A/B/C companies for decades. This benefit has never been passed to customers who are self employed with good scores and records. 

Lenders are reluctant to offer this across all retail products as they fear it will impact margins. Lenders offer on case to case basis to customers who negotiate for better terms. Bigger retail lenders are yet to announce risk-based pricing for all segments of customers. This may be due to pressure on the margins.

More banks going forward will definitely adopt risk-based pricing. This will kick in once the largest loan providers will offer this benefit to their customers.

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