Changing landscape of the credit industry

Changing landscape of the credit industry

For the economy to function smoothly, it is important that consumers have access to credit. However, borrowers must pay their EMIs on time as well as ultimately pay back their loan on time. Otherwise, the entire consumer economy could collapse. In India, most of us take a loan to buy a car, buy a home or to purchase consumer items such as refrigerators, television or to enjoy a foreign vacation. As things stand, all borrowers generally pay the same interest rate irrespective of whether we have a good track record or not. This is about to change. Two dynamics are at play that will affect our ability to get loans and the interest that we pay on them.

First, starting July 1, according to RBI guidelines, banks will price their loans using a Base Rate. To this Base Rate they will add a risk premium which will be specific to the kind of risk that the bank perceives you to carry, based on your creditworthiness. Your classmate from school with a bad reputation for borrowing money will most likely be charged a higher risk premium because of his/her ‘tainted’ history.

Secondly, banks are increasingly accessing your ‘credit history’ or your past records if you have taken loans and analysing how disciplined you have been to pay them back on time and in full. Specialised institutions called credit bureaus have been authorised by the RBI to be set up to be a repository of factual data on your track record of your timeliness in paying your loans including credit card borrowings, history of your cheque bounces and the number of applications you make to access credit (whether through credit cards, personal loans or other types of loans). Lenders can access reports available from these bureaus and on the basis of this interpret your track record to decide whether they want to lend to you or not and on what terms.