Banks Linking Credit Score to Decide Interest Rate for Retail Loans
In a recent announcement, the three public sector banks namely Union Bank of India, Bank of Baroda, and Syndicate Bank have taken their first step in making retail loans more transparent for their potential customers. These banks have started using the third-party credit scores of their potential customers to decide the rate of interest to be offered to a particular borrower.
It will be applicable on home-financing rates. The score received from the Credit Information Bureau (like CIBIL – Transunion, Experian, CRIF-High Mark, Equifax) will be taken into consideration. On the basis of the shared credit score, these banks will price the fresh home loans. Banks will be using the three different credit scores currently. Borrowers with higher credit score above 760 out of a maximum 900 will have to pay the lowest rate of interest. Customers with lower credit score will have to bear higher rate of interest on home loans compared to customers with above 760 score.
Borrowers in the category of the score above 760 will have to pay 8.10% pa. on the fresh loans from Bank of Baroda. For the customers falling in the middle category with score between 725 and 759, the interest rate will be 8.35% pa. For the third category with the lowest score of 675 to 724, the applicable rate of interest will be 9.10% pa. It is the lowest credit score at which loans will be provided to home buyers.
The credit score of borrowers is expected to become more important in deciding the retail loan interest rate because RBI has allowed the high-street banks in the country to charge a credit risk premium over external benchmark to calculate effective rate of interest. It is from October 1, 2019 banks have introduced external benchmarks to charge the interest on floating rate retail loans.
Interest Rate to Fluctuate
Over the time, credit score will be playing a very important role throughout the loan cycle.
“If, after one year, the borrower improves her credit score, the risk premium will go down. Conversely, it could go up if a borrower’s credit score drops below 760,” said Virendra Sethi, Head, Mortgages and Other Retail Assets, Bank of Baroda.
Syndicate Bank merging with Canara Bank shortly, decided to increase the credit risk percentage if the borrowers’ credit score were to decrease by over 50 points.
“Interest rates could also change based on the deterioration in credit profile — if the borrower has delayed EMI payments for more than 30 days three times in the preceding one year,” said Mrutyunjay Mahapatra, MD and CEO, Syndicate Bank.
Union Bank of India will be charging 10 bps excess to customers with credit score below 700 falling in the third category. The score shared by other companies like Experian, Equifax, CRIF Highmark apart from CIBIL will also be considered. The score rated by these companies are based on the several factors including the borrower’s payment track record in the past. In CIBIL, the score 900 being the highest and 300 being the lowest score, the score ranges 300 to 900.
Some banks have stuck to an internal credit assessment, while others have chosen to use external credit scores. Lenders have been using the repo rate while Citibank has been using the three-month Treasury bill yield as its benchmark.
According to the experts, internal grading system for the retail loan interest pricing will not be considered a transparent way.
Rohit Ranjan, Head, Secured Lending and Citi Business, Citibank India said, “In the past nine months, 100% of our home loan customers have chosen the Tbill-linked loans over MCLR-linked loans. They recognize that an external benchmark is easy and simple to understand.”
Conclusion:
Every individual is advised to maintain good credit score to save on interest and enjoy varied offers on loans. Customers can take the advantage of Antworks Credit Doctor to keep a close check on your credit health.
