Different interest rates for different customers

Wednesday May 27, 2009

The STAR online

Plain Speaking – A Column by Yap Leng Kuen

Under new system, rates may be set based on portfolios of loans and creditworthiness CONSUMERS may not be getting flat rates on their loans once a new pricing approach called risk-based pricing takes place. Under this new system, different interest rates may be set not just based 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 also depends on the banks they use, as banks with more efficient capital and risk management will be able to give lower rates.

In a recent interview with StarBiz, Malayan Banking Bhd president and CEO Datuk Seri Abdul Wahid Omar explained: “Under Basel II, we are looking at the credit standing of borrowers which will be based on our own internal risk ratings. Therefore, the rates offered may differ from one bank to another. Quality borrowers would enjoy lower priced loans.’’ Some banks may have a rating scale of 1 to 10 while others may implement a scale exceeding 10 or even 20 grades.

“So for each rating, we will actually compute, among other things, the probability of default, exposure at default and loss given default. The actual numbers would depend on a bank’s own default experience. “The risk weights assigned to borrowers may range from a low of 15% to more than 200%, depending on their rating grades. Some investment-grade borrowers such as government-linked investment companies may carry the lowest risk weights,’’ he said.

 For the corporate and business segments, the risk weights are assigned on an individual basis, while for the retail segment, it is usually assigned on a portfolio basis, he added. For a consumer to qualify as a good borrower, he or she must ensure that they have an unblemished credit track record.

In the case of companies, the key drivers include, among other things, good management, ability to repay and sound cashflow. Credible credit plans and historical cashflows will form an important part of the companies’ evidence that it can repay its debt. Much thought is likely to be centred on how to avoid a poor credit assessment. At the outset, it is advisable to understand the type of documentation the bank is looking for, as well as its approach to credit risk assessment.

“In terms of loan pricing, risk weights assigned may be reduced through availability of quality collaterals. As such, a bank may be able to price its loans lower given good credit rating and supported with quality collaterals,’’ Wahid said.

Therefore, when it comes to shopping for a loan, one should start making enquiries on when this new development is likely to take place and the best deals that can be obtained from individual banks. When that happens, it is likely to be true competition based on proper calculations and not just in response to “pressure’’ or requests from buyers who shop in between banks, giving rise to a situation that has been described as “irrational competition’’. Senior business editor Yap Leng Kuen believes that when it comes to dollars and cents, it is best to be vigilant and not leave anything to chance.


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