Imagine this: You and your friend walk into a bank's branch to apply for loans to buy similar cars ahead of Diwali. The bank offers you a loan with a much lower EMI compared to your friend despite identical earnings and terms.It's because a credit information company has concluded that you have a lower chance of defaulting based on your past history and marked you a much higher "score" compared to your friend.
Welcome to the world of differential retail interest rates.
Battered by the steady rise in bad loans during the last few months, most banks have set up rigorous systems, including reports from credit information bureaus, to determine the repayment capacity of a borrower.
A cleaner track record will entitle individuals to loans at lower interest rates.
"We drive value through differentiated offerings like that of flexible interest rates to customers with long-term relationships and strong credit history," said Anand Selva, head, consumer bank, Citi India.
Consumers can purchase their credit scores directly from firms such as Credit Information Bureau of India Ltd (CIBIL) to know their specific "credit score."
State owned Indian Bank charges lower interest rates from those who opt for "combo" loans that bundle personal loan along with credit for a house and car.
"Interest rates are different for different customers, we are charging lower interest rates from customers who take all these three loans from us as we can securitise the loan," TM Bhasin, chairman and managing director, Indian Bank told Hindustan Times.
According Credit Information Bureau of India Ltd managing director to Arun Thukral, the credit score "will help in making the lending process more transparent, inculcating financial discipline and enhancing consumer awareness on credit information".