Cheaper repeat loans likely for zero-default borrowers

Written by M Sarita Varma | Thiruvananthapuam | Updated: Aug 8 2013, 18:48pm hrs
Repeat loans are soon likely to be cheaper for zero-default borrowers, Credit Information Bureau (India) said on Wednesday. The credit score of every individual or organisation who avails loans is calculated on a scale of 300 to 900, and borrowers having a score of 750 and above are considered to be very creditworthy.

Since the Reserve Bank of India (RBI) has categorically mentioned in its report the possible introduction of risk-based pricing, banks in India are taking the cue and implementing it is a scenario thats likely to open up very soon, said Cibil senior vice-president Harshala Chandorkar.

World over, the banks have already moved to this model and there is little doubt that Indian banks, too, will follow this trend. When this happens, this would mean that all those who pay their loans in time could ask for a cheaper rate the next time they avail a loan, she told FE, at the sidelines of a conference.

RBI has been hinting on this development for a while. Banks without a formal risk-based pricing approach, typically, use a flat-rate pricing model. The inherent problem with this is the bank will end up having a higher share of lower credit quality loans since the higher credit quality borrowers can obtain better pricing at other banks (i.e., those offering risk-based pricing), said RBI deputy governor KC Chakrabarty at the inaugural session of a conference of non-executive directors on boards of commercial banks.

Chandorkar, meanwhile, said this creditworthiness-focussed shift has started. Already, we have been told that some banks in our country, as a customer-friendly approach, have started offering better rates to creditworthy people and this scheme is there in other parts of the world. Very soon reputational collateral would be important in making loan decisions, she says.

CIBIL is Indias first Credit Information Company (CIC). Though it was founded in 2000 by State Bank of India and HDFC Bank, currently, the biggest shareholder is Trans Union International. It collects and maintains records of an individuals payments pertaining to loans and credit cards.

These records are submitted to Cibil by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to lenders in order to help evaluate and approve loan applications.