Work hard to improve your credit score
This assumes significance with more lenders likely to increase their risk premiums
Bank of Baroda (BOB) recently hiked the credit risk premium it charges home loan customers (the risk premium is added to the external benchmark rate to arrive at the home loan rate). It also made its credit score criteria more stringent. State Bank of India, the country’s largest lender, hiked its risk premium in May. The gains that accrue to a home loan borrower because of the decline in the repo rate get offset, to some extent, when there is an increase in risk premium.
Bob’s best rate has risen from 6.85 per cent to 7 per cent thanks to the hike in risk premium. The credit score needed to avail of this rate has risen from 726 and above to 775 and above. The bank offered four credit score slabs (with linked interest rates) earlier. That has now increased to five. The risk premium range — the difference between what customers in the top and the bottom credit score slab pay — was 100 basis points (bps) earlier, but has now increased to 135 bps.
Banks expect the stress in their loan books to rise and, hence, want to provision for this by charging a higher risk premium. “Given the uncertainty surrounding the income and financial stability of borrowers and risk aversion among banks, the latter are leveraging the credit score to reduce their risk,” says Adhil Shetty, chief executive officer, Bankbazaar. He believes other banks might follow suit. And while the higher risk premium currently applies to new borrowers, Shetty believes that if a customer’s credit assessment undergoes a substantial change, the risk premium associated with her loan could also be revised.
As for BOB making credit score standards stiffer, Arun Ramamurthy, a Mumbai-based credit advisory expert, says: “The idea is to cherry-pick better-quality borrowers.”
Many customers who had
Do not miss out on EMIS or credit n card repayments
Do not exceed 40-50 per cent n of the spending limit on your credit card
Maintain a mix of secured and n unsecured loans and avoid overdependence on the latter Closing old accounts, like a credit n card that you have used for 10-15 years, may adversely affect your score
Do not apply to 10-15 banks n when you need a loan. Too many hard enquiries in succession affect your score Now that the moratorium has n ended, start repaying your EMIS unless your loan gets restructured
applied to BOB for a new loan or to refinance an old one could not get their loans sanctioned before the rates increased. “Those who have not yet paid a processing fee or got a sanction letter should try other players from whom they could get a rate slightly below 7 per cent,” says Aditya Mishra, founder and chief executive officer of Switchme, a digital home loan broker. He also emphasises the need to act fast.
Overall, this is a good time for taking a home loan. “Interest rates have fallen from around 8 per cent oneand-a-half years ago to around 7 per cent now. Against this backdrop, even if a bank does risk-based pricing, you are still getting a good rate,” says Ramamurthy. He believes that since lenders are flush with liquidity, face high competitive pressures, and need to build their retail loan books, they might not raise risk premiums much.
The bottom line is that while a good credit score was always an asset, it has become even more crucial now. So, do your best to maintain or improve it (see table).