If a borrower improves her credit score by repaying loans on time regularly, the risk premium will go down
On April 1, state-run lenders, Dena Bank and Vijaya Bank, merged with Bank of Baroda and became the country’s third largest bank after the SBI and HDFC Bank. The consolidated bank was named Bank of Baroda and has over 9,500 branches, 13,000 ATMs, 85,000 employees and 12 crore customers.
Moneycontrol’s Hiral Thanawala spoke to Virendra Sethi, Head of Retail Banking and Mortgage at Bank of Baroda, talks about the way the bank is gaining by cross-selling to new customers of the merged entity and changes made in products portfolio. He also elaborates on switching from MCLR to repo rate-linked home loans, and using credit scores of borrowers to price the loans on offer.
Q: How do you plan to gain from this mega-merger and what are the products/schemes that you plan to cross-sell to customers of the merged entity?
A: After amalgamation, at the back-end we ran an algorithm to identify potential customers from Dena Bank and Vijaya Bank with a good track record of savings and credit score. Now, we are cross-selling pre-approved personal loans, home loans and car loans to them without seeking any income document. We intend to build a good-quality loan portfolio in the amalgamated entity.
Q: Have you retained any loan schemes from the merging entities (i.e., Dena Bank and Vijaya Bank)? Also, are you planning to close any bank branches after amalgamation?
A: In retail loans (home loans, auto loans, personal loans, etc.), a majority of the schemes that have been retained are those of Bank of Baroda, as it had the best features compared to the merged entities. In gold loans, we adopted the scheme from Vijaya Bank as it had better features.
We are not closing any branches, but some relocation is planned to avoid overlapping of branches at a single location.
Q: Since October 1, under the new external interest rate benchmarking regime, Bank of Baroda is using credit scores of borrowers from the Credit Information Bureau (India) Ltd (Cibil) to price new home loans. How will it impact the borrowers?
A: Under this regime, borrowers with high credit scores from CIBIL, i.e., defined as scores in excess of 760 out of a maximum 900, will pay 1 per cent lower interest compared with those reporting scores in the 675-724 range—the lowest score slab at which loans will be offered. At present, borrowers with a credit score above 760 (out of 900) are paying 8.1 percent interest on new loans. Those in the lowest 675-724 range are paying 9.1 percent and those in the middle range of 725-759 are charged 8.35 percent. After one year from the date of borrowing, the interest rates will be reset by the bank based on borrowers’ credit scores. So, if a borrower improves her credit score by repaying loans on time regularly, the risk premium will go down. Conversely, it could go up if a borrower's credit score drops below 760, due to excess debt, defaults in monthly installments, etc.
Q: How different is your repo-rate-linked home loan scheme compared to those offered by other banks?
A: From October 1, our home loan rate has been lowest in the market, at 8.10 per cent, offered to select customers having credit scores above 760. Some, banks are charging three different rates for home loans, depending on the amount. They also have different rates for salaried and self-employed persons. Some, banks even charge 5-10 basis points less interest rate from women borrowers. In the case of Bank of Baroda, our rate of interest is the same for any home loan amount and for all class of customers.
Q: Is it the right time to switch from MCLR home loans to repo rate-linked ones? What is the process, and the fees to switch for your existing customers?A: This is the best time to switch from MCLR to repo rate-linked home loans since there is a difference of 20 basis points in MCLR and repo rate-linked loans offered by most banks. After switching to repo rate-linked loans, borrowers will save on their equated monthly installments (EMIs). While switching, the existing credit score of the customer will be taken into consideration and interest rate will be calculated by the bank. To existing customers of Bank of Baroda, we are giving a one-way option to switch home loan interest rates from MCLR to repo rate linked ones. It means they can’t go back to MCLR-linked home loans in case repo rate-linked loans become costlier in future compared to MCLR loans. To switch from MCLR to repo rate-linked loans, we are charging nominal fees of Rs 2,500 from customers.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.