Good rates for good borrowers

PETALING JAYA: A new approach by banks called risk-based pricing is expected to boost both their top line as well as bottom line, say industry players.

Under this new system, different interest rates may be set based not just on different portfolios of loans but also different types of customers.

The more creditworthy consumers who show, among other things, that they can repay promptly and do not over-borrow, will likely obtain better interest rates.

This is in line with the current global banking trends as seen in initiatives such as Basel II, which encourages voluntary internal-based ratings that place an increasing importance on the accuracy of risk measurement and pricing of risk portfolios.

Alliance Bank Malaysia Bhd group chief executive officer Datuk Bridget Lai said by being able to recognise its quality borrowers, it would be able to further enhance cross-sell opportunities, which in turn would boost its topline.

“In terms of bottom line, higher-risk borrowers can be identified, and their risks addressed and mitigated through higher pricing. This should serve to protect our bottomline,” she told StarBizWeek.

Lai said its pricing differentiation on home loan applications was based on a margin-of-advance or loan-to-value ratio, as well as the loan size.

She said its home loan borrowers were also rated or categorised based on their loan application score card, which comprises various criteria that differentiate credit quality and, hence, lending rates between borrowers, even within asset classes.

“These criteria or attributes of the loan application score card are derived statistically from our internal loan and customer data, calculated over a period of time,” Lai said.

RHB Banking Group head of retail banking Renzo Viegas concurred that risk-based pricing was a more efficient pricing hypothesis as the rate offered to the customer would efficiently reflect the cost of the credit risk associated to the borrower.

“This is a win-win approach for both the bank as well as customers – a higher rate for customers with higher risk while rewarding low-risk customers with lower rates. We are then able to shift our portfolio towards low-risk borrowers, hence reducing non-performing loans (NPLs) and making the mortgage business more profitable,” he noted.

Bank Negara’s latest quarterly bulletin said net NPL ratio in the local banking system was seen to be flattening at 2.2% for the first half of this year, mainly attributed to higher recoveries and restructuring of loans to performing status.

In fact, on the sectoral front, the lower NPL ratio was driven by the decline in NPLs in the household loan segment, the report added.

With RHB being one of the first local banks to implement the risk-based pricing approach, its customers were pleased with the new system due to the attractive rates offered to the low-risk category, said Viegas.

However, Lai cautioned that the approach was not flawless in nature.

“Customers from the lower-income group and self-employed customers with no credit history are generally accorded high-risk ratings. This is in line with the bank’s prudent practice to ensure risk is mitigated to the minimum while accommodating financial needs of the customers,” she said.

Lai also said the approach was a flexible rating device that could be applied for other loan products, such as hire purchase and personal loans.

“We plan to introduce risk-based pricing on individual borrowers after the full implementation of our mortgage application credit score card by the first half of 2010,” she said.

By The Star (by Laalitha Hunt)