Credit Score To Now Determine Interest Rate For Customers: Three PSBs Take Steps To Segregate Retail Loans Into Slabs

As per new external benchmarking regime for loan disbursal, three Public Sector Banks (PSBs), Bank of Baroda, Syndicate Bank and Union Bank of india, will now use third party credit scores of potential buyers for offering them home financing, reports Economic Times.

Borrowers will now be divided into different slabs, according to their credit scores, to assess the terms and interest rate for loan.

For example, Bank of Baroda has decided to use Cibil scores for dividing borrowers into three different slab to give out new home loans. The first slab include borrowers having Cibil score ‘above 760’, the second one include those having scores between 725-759, while the lowest score slab at which loan will be offered will be 675-724.

The borrowers belonging to first slab will have to shell out 1 per cent lower interest rate that those in the last slab.

In the future, the rate of the loan will fluctuate through the life of the loan as per the credit score of the borrower. That is, if a borrower improves her credit score the interest rate may be lowered.

It should be noted that RBI has now allowed several high-street banks to charge a credit risk premium over external benchmarks to compute effective interest rate and it is in this respect the decision has been taken by the three PSBs.

Banks have started using different instruments as their benchmarks, for instance, Citi Bank has already adopted three-month T-bills as their benchmark. According to some officials there, T-bill linked loans are been preferred over MCLR-linked loans over the past nine months.

In contrast, State Bank of India has decided to follow its internal risk grading approach, dividing the borrowers into six risk grades for loan disbursal.