Good credit score doesn't mean cheaper loans

If you have a good credit score from a credit bureau, don’t think you might get a loan at a lower rate. But you could get it faster and with fewer checks.

Process differentiation is the first advantage customers can look forward to as a result of their good credit scores. Next could be the rate differential, which might take some time, says Mohan Jayaraman managing director (MD), Experian Credit Information Company of India.

A credit score is a number indicating the borrower’s potential to repay and chances of default. It indicates creditworthiness of the person. Banks and lenders now increasingly rely on credit scores to decide if a loan should be approved. Usually, the higher your score, the better the chances of your application getting approved.

Explaining why banks are not yet offering lower rates for customers with good credit scores, Jayaraman says for Indian banks, consumer lending segment is a fairly low-margin business. So, their aim would be to keep margins steady. But several banks have simplified the process for customers with better scores.

For example, for a customer with a good score, the bank might do away with multiple field investigations. If normally, a bank conducts two field investigations before approving a loan, in this case it could be just one. Also, the turnaround for approving the loan could be faster. For instance, a day or two. For others, it might take up to a week.

Unsecured loans, such as personal loans, is where the differential, especially the rate differential is likely to be seen before other segments, since the margins are higher.

In personal loans, some banks offer better deals for customers of a particular profile, such as those working in a particular company and who could have their salary accounts with the bank. Or customers who already have a relationship with the bank.

Eventually, the credit score will be a new segment for banks to approve the loan. “For instance, banks will say that borrowers in certain bands will get better scores,'' says Jayaraman.

According to Prashant Joshi, MD and head of private business clients, India, Deutsche Bank, a good credit score does help reduce the turnaround for approving a loan, more so in the case of unsecured loans. In the case of secured loans, such as home loan, a bank will need to conduct property verification, which might take time.

For a customer to get the benefit of a better rate in line with a superior credit score, the score needs to stabilise over a period, say three to five years. Only then will it be possible for banks to offer risk-based pricing, he says.

Shyamal Saxena, general manager, retail banking products, Standard Chartered Bank, says the market will eventually evolve to pricing differential based on credit scores. As of now, for a customer with a good score, banks might do fewer verification.

"The retail credit penetration in India is still very low and there are a large number of customers for whom banks will conduct extra verification,'' he says. Customers can know their individual scores by accessing their individual credit report from bureaus. Most charge between Rs 100-150 for this.