The state-run Bank of Baroda (BoB) has hiked the risk premium it charges from August onwards for new customers. The bank has also made its lending policy stricter by increasing the credit score requirement for loans, according to intermediaries.
Earlier, the bank gave its best home loan rate, which it calls Baroda Repo Linked Lending Rate (BRLLR), to those with a Cibil score of 726 and above. The bank’s BRLLR was 6.85% in July. From August onwards, a borrower must have a Cibil score of 775 and above to get the lowest rate. The bank considers these borrowers to have the best creditworthiness. The bank’s BRLLR is now at 7%.
The lender has different rate slabs for borrowers with lower credit scores. As the credit score gets lower, the bank charges a risk premium or a spread over its best rate. The second slab that BoB had earlier was for customers with credit score between 701 and 725. It charged a risk premium of 25 basis points (bps) above its best rate, BRLLR, for those in the second slab. One basis point is one-hundredth of a percentage point.
Now, the bank’s credit score requirement for the second slab is between 726 and 775. It also now charges a higher risk premium of 35 basis points, or 10 bps higher than earlier. The bank now has five slabs for customers with different credit score. Earlier, it had only four. For the lowest slab–borrowers with a credit score of less than 650, the spread over BRLLR now is 1.35% compared with 1% earlier.
The hike in the spread and higher credit score requirement is not only restricted to home loans. The bank has done the same for car loans. An email sent to Bank of Baroda seeking reasons for the increase in risk premium and stricter evaluation criteria remained unanswered.
According to banking intermediaries, there are two reasons for the move. “BoB’s interest rates were one of the lowest in the industry. Due to this, the bank received a significant number of applications for home loans and balance transfer. Due to the lockdown, the bank has not been able to process them and there’s a considerable backlog. It could easily take months to clear it," said an intermediary on condition of anonymity.
The intermediary further added, “When there’s high demand, the bank can increase the price for a higher profit."
According to another intermediary, BoB has increased rates as it needs to make provisions for non-performing assets (NPAs) that could arise after the moratorium ends. “The bank is making provisions based on its estimates of NPAs in the future due to which it has hiked rates," said the intermediary on condition of anonymity.
The Reserve Bank of India had made it mandatory for banks to link all floating rate retail loans to an external benchmark from 1 October 2019. According to the central bank’s annual report 2019-20, public sector banks on average offer home loans at 3.3 percentage points higher than their external benchmarks. Private sector banks charge an average of 5 percentage points more. For auto loans, the average spread is 4.6 and 6.7 percentage points over the external benchmark.
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