For bank borrowers, it might soon pay to be well-behaved. Banks are considering the introduction of a behaviour-based dynamic lending system once the base rate mechanism is in place from July.
Once the proposal, at drawing board stage at a number of banks, is implemented, a customer's record on timeliness of payments, performance on other loan commitments and frequency of cheque bounces would go into calculating a behaviour score.
Banks are already accessing the credit score from credit information companies while determining the worthiness of a prospective borrower. Now the data would be accessed more frequently to keep tabs on customers.
The base rate mechanism has given banks the flexibility to not only charge retail customers according to their risk profile, but also make changes to the risk weight during the term of the loan.
This means customers who are regular with their equated monthly installments can expect to have a few basis points shaved off the interest rate on an existing loan. In contrast, customers who are irregular with their repayments might see their interest charges bumped up.
At present, most banks charge retail customers a fixed rate of interest on loans or a floating rate, which moves in tandem with their prime lending rate.
There is no provision to change the rate charged to a customer on an individual basis during the tenor of the loan.
In case of credit cards, some banks, especially the foreign players, review the interest rate on a quarterly or half-yearly basis, based on the repayment record for the card issued by them. The repayment record for other loans and cards from other banks is not factored in.
The base rate system requires banks to declare a floor rate below which they would be barred from granting loans. To arrive at the final rate charged to customers, banks are permitted to add other weight-risk premium and a tenor premium to the base rate.
Bankers said they also have the flexibility to change the risk premium during the tenure of the loan as long as they are transparent about their pricing mechanism.
"The base rate will allow risk-rate pricing for retail customers. You create a behaviour score card for a particular customer and depending on his performance, you either increase or decrease the interest rate you charge him," said Shyamal Saxena, general manager, Retail Banking Products at Standard Chartered Bank.
"The base rate system has definitely set the foundation for dynamic pricing of retail loans. This is a fairly common practice abroad where all interest charges are linked to a customer's behaviour score. It is still unknown in India," said a senior Axis Bank executive.
The executive, however, added that the system would not work if only a handful of banks shift to a dynamic pricing mechanism.
However, bankers say they would not be able to change to a dynamic pricing process mechanism overnight and it might take months before it is introduced.
"The consumer banking business in India has seen significant volumes only in the past five-six years and is still not mature. Customers would have to be convinced that such a mechanism is in their best interest," said a senior executive of a public sector bank.
Besides, executives at private sector banks said the public sector players did not do data mining to the extent that is possible. The public sector players account for around 73 per cent of the banking business in the country.
"From a risk-evaluation point of view, a lot needs to be done in India. It will take time for sophisticated credit-scoring models to develop," said Standard Chartered Bank's Saxena.
A Mumbai-based financial planner said a move to dynamic pricing would require a change in the contractual agreement that customers sign before availing of a loan.
"Banks will have to clearly explain how they will change the interest rate. It will not be easy to convince customers to sign off on a dynamic pricing clause," he added.
Some bankers are also skeptical about such a move.
"Technically it is possible. Banks will have to make sure that they are transparent about how they are charging customers. It also remains to be seen how the Banking Codes and Standards Board will view such a move," said a senior executive from public sector lender.