Home loans based on credit rating launches in India

BoB has introduced differential rates of interest on home loans, based on customer's credit standing. 

The Credit Bureau Information of India Limited (CIBIL) maintains borrowers' data and keeps a record of all the financial transactions of different banks and NBFCs. There are four such credit bureaus in India. CIBIL has a scoring methodology, to indicate the credit worthiness of a borrower, ranging between 300 and 900. Higher the score, better is the credit facilities availed by the person. So, 750 is considered as the standard score for loan eligibility by lenders. 

For this, the banks are also required to benchmark their lending rates against the marginal cost of funds-based lending rate (MCLR). The banks are not allowed to lend below the MCLR. In effect, the banks keep an extra margin over their MCLR, for fixing home loans. This margin is called 'spread'. 

The present MCLR of Bank of Baroda is 8.35 per cent. It has decided to reward people with good credit standing, by offering them home loans without charging any 'spread'. So, an individual who has a credit score of 760 and above, will be given a home loan at 8.35 per cent. For borrowers with credit scores between 725 and 759, the rate of interest will be 8.85 per cent with a spread of 0.50 per cent. Borrowers with credit scores of 724 and below, will have to pay 9.35 per cent with a spread of 1 per cent over the MCLR. For example, a person, who takes a home loan of Rs 1 crore for 20 years at 8.35 per cent, has a credit score of 825, will have a monthly EMI of Rs 85,835. 

Bank of Baroda is offering concessional home loan interest rates because the probability that the person with a CIBIL score of more than 760 will default on his loan payment, is lower than the probability of default by a person with a lower score. 

So, the interest that a customer would pay on home loans will now be linked to his credit rating, or the discipline he maintains in repaying his existing loans. If the credit score improves, he will have to pay less EMI, and the other way around.