NTH :: Bank of Baroda plans rating-based lending


By Saloni Shukla, ET Bureau | Jul 07, 2016, 03.37 AM IST | Economic Times

NTH

Mumbai: Bank of Baroda for the first time is set to offer rating-based lending to retail mortgage loan seekers, which involves giving loans based on credit scores and not a uniform rate irrespective of the credit quality.

“We have internally switched to scoring-based pricing based on the CIBIL score,” PS Jayakumar, MD, Bank of Baroda, told ET. “With this, we can identify the right kind of borrower, our due diligence becomes easier, and the probability of a default will be minimal.”

Historically, Indian banks charge corporate customers based on their credit rating, but haven’t extended this policy to retail borrowers. Customers with a good loan repayment track record and strong financials may end up availing loans which are at least 50-75 basis points cheaper than a customer with a bad credit score.

The move is expected to improve the quality of bank’s retail portfolio as they will now disburse loans based on the customer’s credit profile. It will also provide an opportunity to the customer to maintain a consistent credit behaviour and increase his credit score to get the benefit of lower rates.

Banks have used credit information companies to reduce risk in their retail loans but failed to pass on the advantage to customers.

Between fiscal 2011 and 2014, while the total gross non-performing assets in the corporate sector grew by 300 basis points, non-performing loans in the retail segment fell by over 170 basis points, indicating that the use of information bureaus were one of the key drivers of retail non-performing assets.

Credit information bureaus such as CIBIL in general assign rating between 300 and 900 points. Low rating is assigned to individuals who are the least trustworthy and high rating is assigned to blue chip customers.

“It will remove subjectivity in decision making because it is a far more objective parameter,” said Jayakumar. “The adjusted pricing that the customer pays is more or less constant because lower scores have higher risk and higher scores have lower risk.” Home loans contributed to nearly 9% of Bank of Baroda’s total advances at Rs 24,975 crore.

Other retail loans, which include personal loans, contributed 7.64% to the total book at Rs 21,463 crore.

Source : http://goo.gl/EOWbLc

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