Banks and financial institutions in India are waking up to the concept of ‘risk-based pricing’ while lending to individuals.
This involves assessing the loan servicing capacity of individuals prior to finalising the rate of interest and other terms and conditions based on which actual lending takes place.
PRICING LOANS
Credit scores given out by credit information bureaus assist both banks and individuals here, said Harshala Chandorkar, Senior Vice-President-Consumer Relations, Credit Information Bureau (India) or Cibil.
These have come to be widely used to price loans in countries where credit information infrastructure is well-developed, she told newspersons here.
“In India, the infrastructure is still in the nascent stages of evolving. But many banks have already started using credit scores. We’ve already heard about instances where consumers have gained from speedier processing and faster approvals, among a host of other non-financial benefits,” Chandorkar said.
SCORE RANGE
The Cibil TransUnion Score is now being widely used by banks and financial institutions for credit decisions. This score assigned to a borrower ranges from 300 to 900.
The higher an applicant’s score or the closer it is to 900, the more likelihood of the loan application getting approved. Banks will then have more confidence in the individual’s ability to repay the loan.
A Cibil study reveals that borrowers with a credit score of 750 and above have a higher chance of getting their home loan applications approved.
FEWER DEFAULTS
According to Cibil data, personal loans, home loans and auto loans have shown reduction in delinquencies over the past three years. This is thanks to the use of the Cibil score and its adoption by banks and financial institutions over this period.
Credit demand is on the rise with the number of applicants for new loans increasing by 150 per cent over the past few years.
More than 80 per cent of borrowers in the country have a Cibil TransUnion score greater than 700, Chandorkar said.
KERALA SCENARIO
In Kerala, two-wheeler (32 per cent) and auto (35 per cent) loans are the most availed of form of credit, compared with the pan-India trend.
Also, 21 per cent of all borrowers in the State has a credit score of 800 and above while 40 per cent had 750 and above.
The State has the highest number of credit applicants who are greater than 45 years of age. At least 50 per cent of the borrowers in the State are new to credit, compared with 51 per cent all-India.
But the State has very low penetration of credit cards and personal loans, which shows untapped potential, Chandorkar said.