Active Stocks
Mon Apr 15 2024 15:59:36
  1. Tata Steel share price
  2. 160.90 -1.59%
  1. ITC share price
  2. 425.90 -0.98%
  1. State Bank Of India share price
  2. 757.75 -1.17%
  1. ICICI Bank share price
  2. 1,078.80 -2.30%
  1. NTPC share price
  2. 361.35 -0.08%
Business News/ Industry / Banking/  BoB increases risk premium on loans, tightens credit norms

BoB increases risk premium on loans, tightens credit norms

Earlier BoB charged a risk premium of 25 bps above its best rate for customers with credit scores of 701-725

The logo of Bank of Baroda (istock)Premium
The logo of Bank of Baroda (istock)

MUMBAI/NEW DELHI : State-owned Bank of Baroda (BoB) has adopted a strict lending policy by increasing the credit score requirements for new borrowers, besides increasing the risk premium, according to intermediaries.

Till July, BoB offered the lowest home loan rate (6.85%) to borrowers with a minimum Cibil score of 726. However, from August, BoB borrowers must have a Cibil score of 775 or more to get the lowest rate (7%).

The bank offers different rate slabs for borrowers with lower credit scores. As the credit score lowers, the bank charges a risk premium or a spread over its best rate. Earlier, BoB charged a risk premium of 25 basis points above its best rate for customers with credit scores of 701-725. One basis point is one-hundredth of a percentage point. Now, the credit score requirement for the second slab is between 726 and 775. It is also charging a higher risk premium of 35 basis points.

BoB now has five slabs for customers with different credit scores. Earlier, it had four. For the lowest slab—borrowers with a credit score of less than 650, the spread over Baroda Repo Linked Lending Rate (BRLLR) is 1.35%, compared to 1% till July.

The hike in spread and higher credit score requirement is not only restricted to home loans. It is implementing a similar approach for car loans. An email query to BoB seeking clarifications on the increase in risk premium and stricter evaluation criteria remained unanswered.

According to banking intermediaries, there are two reasons for the move. “BoB’s interest rates were one of the lowest in the industry. Due to this, the bank received a significant number of applications for home loans and balance transfer. Due to the lockdown, the bank has not been able to process them and there’s a considerable backlog. It could easily take a month to clear," said a person, requesting anonymity. “When there’s high demand, the bank can increase the price for a higher profit."

According to another intermediary, BoB has increased rates as it needs to make provisions for non-performing assets (NPA), which may arise once the moratorium ends. “The bank is making provisions based on its estimates of future NPAs," he added.

The Reserve Bank of India made it mandatory for banks to link all floating rate retail loans to an external benchmark from 1 October 2019.

According to the RBI’s annual report for FY20, public sector banks on an average offered home loans at 3.3 percentage points higher than the external benchmarks. Private banks charged an average of 5 percentage points more. For auto loans, the average spread was 4.6 and 6.7 percentage for public and private sector banks, respectively, over the external benchmark.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 25 Aug 2020, 11:23 PM IST
Next Story footLogo
Recommended For You
Banking Stocks
Switch to the Mint app for fast and personalized news - Get App