If you thought a high credit score will fetch you lower interest rates on home loans and car loans, you can't be faulted because that is how it works in several other countries. But not in India, because the country is yet to implement the risk-based pricing for retail loans, and as of now, the credit score is used only for deciding one's eligibility for retail loans.
Banks say that retail loans are given on very thin margins. "Even if a customer has a high credit score, we cannot reduce the interest rate as the spread or the mark-up over the bank's base rate is pretty thin. We do not distinguish between customers while giving home loans or auto loans. The score will decide only your eligibility for a loan and not the final price you pay for the loan," say bankers and credit rating agencies.Rajnish Kumar, managing director of State Bank of India (SBI), who is in charge of retail loans, told dna, "We follow a uniform rate of interest for all our home loan and vehicle loan customers and not distinguish them based on their credit scores. All customers get the bank's current rates of interest on home and auto loans. Credit score allows us one more screening of customers, but the interest rates are enjoyed by all customers who get the sanction."
Harshala Chandorkar, chief operating officer, Cibil, says that the credit scoring helps customers access finance easily and faster by accelerating the loan approval process. "A good credit history gives the borrower an acceptability and helps them build a reputational collateral. Some banks are trying to correlate the credit scores to the cost of loans and we shall gradually witness risk-based pricing becoming a norm in the industry. A higher Cibil TransUnion Score will facilitate faster and affordable access to finance," says Harshala.
If you look at the interest rates of various players in the market, one easily draw the conclusion that there is a thin margin available for them, and that the competition is getting hot. As of now, State Bank of India (SBI), ICICI Bank and HDFC have the lowest home loan rates at 9.5% for women borrowers and 9.55% for general category home loans. ICICI Bank has a fixed rate of interest for ten years at 9.5% to 9.55%, while HDFC has fixed home loans of tenures two years, three years and ten years. The ten-year fixed HDFC home loan is priced at 9.75% and Axis Bank has a fixed loan for 20 years at 11.75%. The home loans have a tenure of up to 30 years.
Mohan Jayaraman, managing director at a credit-rating agency Experian, said better credit scores in developed markets mean lower interest rates. "Unlike in the developed markets where a better credit score can fetch you a lower priced loan, credit scores in India are used more like a benchmark on your credit history. It gives some information on your repayment capacity and sanctions are faster for a higher credit score," says Jayaraman.
A senior officer with Canara Bank also confirmed that a uniform pricing is followed by banks while they sanction retail loans. "Credit scores only help them understand customers better through their credit history. Loan is sanctioned on the basis of the credit score, but the pricing is based on the interest rates that the bank announces from time to time," says the banker.
Another banker said, "RBI is very sensitive about differential pricing when it comes to retail customers. So, the pricing is uniform. Even when banks launch special schemes for new customers at rates lower than those for existing customers, there is a lot of explaining do."
But a loan sanction will depend on your credit score.
So, what counts for a higher score? Cibil says the TransUnion score is arrived at by analysing the consumer's past performance on her debt obligations. This, according to Cibil, is the most important criterion and contributes approximately 30% weightage to the score. Type of loan availed, whether secured or unsecured loan, and the duration of credit history established contribute an additional 25% to the score. The total amount of credit exposure contributes another 25%. Other factors such as credit utilisation, recent credit behavior contribute the remaining 20% to the score.
Jayaraman adds, "We try and analyse how many times a consumer comes to the market to raise loans. If it is very often, then his scores may be low as it reflects that he is relying on borrowings for his needs. The Experian credit score will help banks reduce the layers of investigation on the customers. A higher concentration of secured loans like home loans is generally considered more secure than unsecured loans."
Cibil tries to gauge the amount of credit the consumer is using, if any accounts are past due, how old the consumer's lines of credit are, and the type of credit he has – whether it is all credit cards.
The increased limits on the credit card may be good news for you, but if you reduce utilisation of the credit card limits, you will get a better score. It is always prudent not to use too much of credit, says Cibil. Late payments are negatively viewed by lenders because it indicates that you are having trouble servicing the existing obligations.
Banks say that retail loans are given on very thin margins. "Even if a customer has a high credit score, we cannot reduce the interest rate as the spread or the mark-up over the bank's base rate is pretty thin. We do not distinguish between customers while giving home loans or auto loans. The score will decide only your eligibility for a loan and not the final price you pay for the loan," say bankers and credit rating agencies.Rajnish Kumar, managing director of State Bank of India (SBI), who is in charge of retail loans, told dna, "We follow a uniform rate of interest for all our home loan and vehicle loan customers and not distinguish them based on their credit scores. All customers get the bank's current rates of interest on home and auto loans. Credit score allows us one more screening of customers, but the interest rates are enjoyed by all customers who get the sanction."
Harshala Chandorkar, chief operating officer, Cibil, says that the credit scoring helps customers access finance easily and faster by accelerating the loan approval process. "A good credit history gives the borrower an acceptability and helps them build a reputational collateral. Some banks are trying to correlate the credit scores to the cost of loans and we shall gradually witness risk-based pricing becoming a norm in the industry. A higher Cibil TransUnion Score will facilitate faster and affordable access to finance," says Harshala.
If you look at the interest rates of various players in the market, one easily draw the conclusion that there is a thin margin available for them, and that the competition is getting hot. As of now, State Bank of India (SBI), ICICI Bank and HDFC have the lowest home loan rates at 9.5% for women borrowers and 9.55% for general category home loans. ICICI Bank has a fixed rate of interest for ten years at 9.5% to 9.55%, while HDFC has fixed home loans of tenures two years, three years and ten years. The ten-year fixed HDFC home loan is priced at 9.75% and Axis Bank has a fixed loan for 20 years at 11.75%. The home loans have a tenure of up to 30 years.
Mohan Jayaraman, managing director at a credit-rating agency Experian, said better credit scores in developed markets mean lower interest rates. "Unlike in the developed markets where a better credit score can fetch you a lower priced loan, credit scores in India are used more like a benchmark on your credit history. It gives some information on your repayment capacity and sanctions are faster for a higher credit score," says Jayaraman.
A senior officer with Canara Bank also confirmed that a uniform pricing is followed by banks while they sanction retail loans. "Credit scores only help them understand customers better through their credit history. Loan is sanctioned on the basis of the credit score, but the pricing is based on the interest rates that the bank announces from time to time," says the banker.
Another banker said, "RBI is very sensitive about differential pricing when it comes to retail customers. So, the pricing is uniform. Even when banks launch special schemes for new customers at rates lower than those for existing customers, there is a lot of explaining do."
But a loan sanction will depend on your credit score.
So, what counts for a higher score? Cibil says the TransUnion score is arrived at by analysing the consumer's past performance on her debt obligations. This, according to Cibil, is the most important criterion and contributes approximately 30% weightage to the score. Type of loan availed, whether secured or unsecured loan, and the duration of credit history established contribute an additional 25% to the score. The total amount of credit exposure contributes another 25%. Other factors such as credit utilisation, recent credit behavior contribute the remaining 20% to the score.
Jayaraman adds, "We try and analyse how many times a consumer comes to the market to raise loans. If it is very often, then his scores may be low as it reflects that he is relying on borrowings for his needs. The Experian credit score will help banks reduce the layers of investigation on the customers. A higher concentration of secured loans like home loans is generally considered more secure than unsecured loans."
Cibil tries to gauge the amount of credit the consumer is using, if any accounts are past due, how old the consumer's lines of credit are, and the type of credit he has – whether it is all credit cards.
The increased limits on the credit card may be good news for you, but if you reduce utilisation of the credit card limits, you will get a better score. It is always prudent not to use too much of credit, says Cibil. Late payments are negatively viewed by lenders because it indicates that you are having trouble servicing the existing obligations.
No comments:
Post a Comment