Risk-based loan pricing to spur credit

Risk-based pricing of loans and improved use of customer credit history data can help push up private sector lending by banks, which have been shunning the sector due to the rate cap.

In a topical note on credit, analysts at city-based investment bank Sterling Capital say the move to remove the deposit-rate floor is by itself not sufficient to entice banks back to customer lending.

The Finance Act 2018 abolished the deposit rate floor that had previously been set at 70 per cent of the Central Bank Rate (CBR) or policy rate in the hope that this would spur banks to lend more even with a loan rate cap in place due to improved interest margins.

However, private sector loan growth has remained low, at just 2.4 per cent in the 12 months to December 2018, with the Sterling analysts saying the move has only served to improve the banking sector profitability and not loan growth.

“Banks can (however) use data analytics to group borrowers by risk level in order to determine credit pricing … and the regulators should implement (the) policy to ensure that SMEs and retail customers share correct information on a shared platform before they can apply for any loans from commercial banks,” said Sterling Capital in the report.

“Lenders can also implement a loan pricing model that takes into consideration all historical data and risks associated with a borrower in determining credit risk and loan pricing.”

A risk to this approach would, however, be in the lack of integrity of credit pricing and loan security data.

Banks have also found a viable alternative in government lending when they shun customer loans.

Lending to government comes with fewer administrative demands both in the disbursement and collection of loan dues and is also risk free in that there is little chance of default unlike in the case of private sector lending.