For Re­tail Bor­row­ers, Good Score is No Credit

Cor­po­rate cus­tomers are charged based on their credit rat­ing, but not in­di­vid­u­als. It is time the reg­u­la­tor en­sured re­tail bor­row­ers got a fair deal, say &

The Economic Times - - Money & Banking -

Ever won­dered why de­spite a good loan re­pay­ment track record and strong fi­nan­cials, you end up pay­ing the same in­ter­est rate on your home loan or car loan as your neigh­bor with poor fi­nan­cial cre­den­tials? In­dian banks charge cor­po­rate cus­tomers based on their so-called credit rat­ing, but they don’t fol­low the prac­tice in re­tail lend­ing even though they use credit his­tory from in­for­ma­tion bu­reaus to de­cide whether to give you a loan or not.

This es­sen­tially may well be the case of banks rob­bing Peter to pay Paul: as prof­itabil­ity from lend­ing to com­pa­nies gets squeezed be­cause of their ne­go­ti­at­ing power and due to bad loans, the rates for in­di­vid­u­als with high credit score end up be­ing high for even se­cured lend­ing such as loans against prop­erty and also un­se­cured per­sonal loans.

Un­like in cor­po­rate lend­ing, re­tail lend­ing, which is just about two decades old in In­dia, does not fol­low the prac­tices of the de­vel­oped world, as it suits banks to charge high rates from re­tail­ers who do not have a voice like that of a cor­po­rate to force banks to lower rates based on credit rat­ing.

“Loan pric­ing in In­dia is not only about credit scores, it is about many other things,” Sau­rabh Tri­pathi of Bos­ton Con­sult­ing Group says. “But banks should dif­fer­en­ti­ate be­tween good and bad cus­tomers. It is ad­min­is­tra­tive con­ve­nience not to dif­fer­en­ti­ate be­tween cus­tomers. In re­tail, you ad­ver­tise one rate and you go to the mar­ket. The busi­ness has not ma­tured and evolved enough to reach that stage, but it will come there, it’s a life cy­cle.”

Credit in­for­ma­tion bu­reaus like CIBIL, in gen­eral, assign rat­ing be­tween 300 points — for in­di­vid­u­als who are the least trust­wor­thy and un­likely to re­pay loan, and 900 points — for blue chip cus­tomers with high in­come, with the prob­a­bil­ity of de­fault be­ing al­most zero, like a Hin­dus­tan Unilever or a Proc­ter & Gam­ble of re­tail credit mar­ket in ef­fect. So the lower end of the rat­ing is equiv­a­lent to junk rat­ing, or D, for com­pa­nies and the higher end is like triple A.

Nor­mally, triple A rated com­pa­nies like Re­liance In­dus­tries bor­row slightly above the base rate, cur­rently be­tween 9.3% and 11%, and junk-rated Jin­dal Steel or an Amtek bor­row 6-7% per­cent­age points above the base rate.

But when it comes to per­sonal loans, a cus­tomer with 900 points and an­other with 700 points are charged be­tween 11% and 14%, un­like in the US, where cus­tomers with dif­fer­ent rat­ings are cat­e­gorised as prime, Alt A and sub­prime and are charged vary­ing in­ter­est rates.

“In some de­vel­oped coun­tries, there may be as much as 100 ba­sis points dif­fer­ence (in rates) for the high­est and low­est-rated bor­row­ers,” says John Hartman, pres­i­dent, In­ter­na­tional Equifax, a credit in­for­ma­tion com­pany. “There is more data avail­able on con­sumers. More data means there is more weigh­tage on the score.”

The credit in­for­ma­tion bu­reaus have been a boon to banks, hav­ing helped con­sid­er­ably re­duce the risk of lend­ing to doubt­ful cus­tomers, a far cry from the sit­u­a­tion in the late 90s when in­dis­crim­i­nate lend­ing burnt holes in banks’ bal­ance sheets. The banks’ re­cov­ery tac­tics, such as send­ing goons and eu­nuchs to bor­row­ers’ homes to re­cover loans, led to so­cial back­lash and a scold­ing from the ju­di­ciary. “Re­tail lend­ing in In­dia is port­fo­liobased, mean­ing there is no dif­fer­en­ti­a­tion in the pric­ing of the loan,” says Pralay Mon­dal, se­nior group pres­i­dent, re­tail & busi­ness bank­ing, at Yes Bank. “Banks in In­dia do not lend be­low a cer­tain thresh­old of credit rat­ing. Any per­son be­yond that thresh­old is de­nied a loan, so there is no case for dif­fer­en­tial rates.”

To be sure, credit rat­ing has at least kept credit to re­tail bor­row­ers flow­ing, en­sur­ing banks don’t just slam the door on the en­tire cat­e­gory. The reg­u­la­tor, which also acts as a cus­tomer pro­tec­tion agency in the case of bank­ing, seems to have failed to usher in the cul­ture in re­tail lend­ing though it has been busy push­ing banks to lower their over­all bench­mark rates in re­cent months.

But de­spite re­duced risk in re­tail loans, banks have failed to pass on the ben­e­fit to cus­tomers by low­er­ing rates. Be­tween fis­cal 2011 and 2014, while the to­tal gross non-per­form­ing as­sets in the cor­po­rate sec­tor grew by 300 bps, non-per­form­ing loans in the re­tail seg­ment fell by over 170 bps, clearly in­di­cat­ing that the use of in­for­ma­tion bu­reaus had helped re­tail non-per­form­ing as­sets defy the over­all trend.

“Dif­fer­en­tial rates to the same set of bor­row­ers are not al­lowed un­like in the west where credit scores have high im­por­tance and even peo­ple with lower rat­ings are given sub­prime rates,” VN Kulka­rni, for­mer chief coun­sel­lor at Bank of In­dia’s Ab­hay Credit Coun­sel­ing, said. “Banks don’t of­fer def­er­en­tial rate but a credit score of above 600 en­sures that you get a loan. Any score be­low that, and banks will not lend.”

Credit scores are be­ing used by banks to even push higher lev­els of loans even though they do not talk much about in­ter­est rates. A cus­tomer with 900 points may get home loan of up to Rs 3 crore, but the chances of him get­ting a lower-thanad­ver­tised rates are slim. “Cus­tomers may not get a lower rate but banks may of­fer a higher loan amount to a per­son at the same rate,” Su­mant Kath­palia, head — consumer bank­ing, In­dusInd Bank, says. “Now-a-days many banks of­fer a preap­proved loan in which credit scores play an im­por­tant part, but, yes, it is not the only pa­ram­e­ter for de­ter­min­ing the lend­ing rate.”

Cur­rently, or­gan­ised credit in­for­ma­tion bu­reaus cover about 20% of adult in­di­vid­u­als in In­dia. In China, credit ref­er­ence cen­tre of Peo­ple’s Bank of China cov­ers around 30% of the adult pop­u­la­tion and this cov­er­age is grow­ing much faster than in In­dia, as per a 2014 re­port by Bos­ton Con­sult­ing Group.

That re­tail bor­row­ers are not de­riv­ing the ben­e­fits for good be­hav­iour is partly be­cause of the ab­sence of consumer ac­tivism in In­dia, un­like in the West, and the reg­u­la­tor not hav­ing been able to push the case for banks to end the dis­crim­i­na­tory stance for cor­po­rate and in­di­vid­ual bor­row­ers. Even RBI Gov­er­nor Raghu­ram Ra­jan has high­lighted that bad be­hav­iour by some un­scrupu­lous pro­mot­ers was harm­ing the in­dus­try and greater scru­ples would pos­si­bly do more to bring down bor­row­ing costs than mon­e­tary pol­icy ac­tions. “I am not wor­ried as much about losses stem­ming from busi­ness risk as I am about the shar­ing of those losses, be­cause, ul­ti­mately, one con­se­quence of skewed and un­fair shar­ing is to make credit costlier and less avail­able,” Ra­jan had said.

Credit is costlier for in­di­vid­u­als, bar­ring home loans, prob­a­bly. Will it be set right?

In In­dia, re­tail bor­row­ers don’t de­rive ben­e­fits for good credit be­hav­iour partly be­cause of the ab­sence of consumer ac­tivism

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