In another step that could integrate the Indian banking sector with the international practices, state-owned banks have now started charging variable interest rates based on the credit rating of the borrower. At least three PSU banks viz. Bank of Baroda, Syndicate Bank and Union Bank of India, have adopted this transparent policy of linking the rate of interest on retail loans given to individuals to their credit score maintained by independent agencies like CIBIL.
If you consider the scheme followed by Bank of Baroda for instance, if an applicant approaches for a home loan and his or her CIBIL score is above 760 (900 being the highest score awarded), then that applicant can enjoy a rate reduction of 1% from the rack rate interest. The lower slab of 675 to 724 will have to pay the standard rate. Those having a credit score on CIBIL below 675 won’t be considered eligible for the loan in any case. In real terms, this will be 8.1% pa for those with scores above 760 and 9.1% for the second category. Bank of Baroda has created a third category in the middle for those with CIBIL scores of 725 to 759. These will be charged an interest of 8.35%pa.
The other two PSU banks are also going to be following a similar pattern and they are also going to be using the credit scores given out by CIBIL as the benchmark for this purpose. Incidentally, it can’t be more transparent since the borrower can access his or her credit report either for free or by paying a nominal sum.
To place this in perspective, if you hypothetically take the case of a person availing a home loan of ₹50 lakh for a 25-year tenure, a 1% gain will translate into a saving of ₹3,380 in the monthly EMI and a total saving of ₹10 lakh over the 25-year period.
The borrowers will however have to be aware that if their credit score drops after availing the loan, the banks could keep a track and find the credit risk going up and alter the interest rate.
Apart from CIBIL, there are other agencies too, like Equifax, Experian and CRIF Highmark which generate scores to assess the creditworthiness of the borrowers. These scores are based on data provided by banks and other participants on borrowers' payment track record on earlier loans and utility bills, among other things.
The interest regime in the country now has therefore expanded to have a wide variety of external and internal benchmarks. Banks like Citibank say they follow the three-month Treasury Bills yield rate as the benchmark for lending, while SBI has its MCLR (marginal cost of funds based lending rate) worked out internally. The overall trend however is going towards a transparent external benchmark for fixing rates of interest on retail loans to finance homes, vehicles etc.