Individual track records don’t matter much to Banks when it comes to charging interests, here’s why

Even a good loan repayment track record and strong financials can’t make you pay less interest than someone with poor financial credentials. However, when it comes to corporate customers, Indian banks charge interest based on their so-called credit rating.

This, despite the fact that they get less profitability from lending to companies, because of the negotiating powers that these corporates possess and the bad loans that they are capable of making. Then why individuals with high credit score end up paying high interest rates for even secured loans?

The reason is that retail lending, which is just about two decades old in India, does not follow the practices of the developed world and corporate lending, suiting banks to charge high rates from retailers who can’t express their concerns in a strong voice like that of a corporate.

"Loan pricing in India is not only about credit scores, it is about many other things," Saurabh Tripathi of Boston Consulting Group told ET. "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."

These credit ratings are assigned by information bureaus like CIBIL, who assign ratings to individuals deciding whether they are trustworthy or are unlikely to repay loan. The ratings range from D to triple A.

In the United States, customers with different ratings are charged with varying interest rates, but this is not the situation in India.

"Retail lending in India is portfolio-based, 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."

With credit ratings, banks make sure that there are less chances of bad debts, but despite this reduced risk, banks don’t pass on the benefit to customers by lowering interest rates. This is also partly because of the absence of consumer activism in India, and also because the regulator don’t push banks to end this discriminatory stance.

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