Do banks Reward loyal Customers with Low Inates?

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While old customers can gain by getting low interest rates on loans from their banks, loyalty is not the only criterion for getting preferential treatment

Are you planning to take a bank loan and dreading the tedium of shopping for the best interest rates? Before you begin the legwork and decide to switch banks on the basis of low rates, check with your own bank. After all, you've been a loyal customer for several years and banks should reward this with preferential treatment, right? Not necessarily. While financial institutions do offer privileges to existing customers, this may not be the only criterion that will get you the desired interest rates. Here are the things you should be aware of before you approach your bank for the loan.

Benefits of loyalty

While bank loyalty programmes, which offer reward points on debit card spends, wealth management or priority banking services, are some of the carrots dangled before existing customers, there's another privilege for preferred clients: differential interest rates. So, if you have been operating your account with a particular bank for years and are planning to take a loan, chances are that you can negotiate a sweet deal with your own bank. The interest rate is cheaper by 50-400 basis points compared with that offered to new customers. It may even beat the rate offered by other banks that you approach. Other than getting lower interest rates, banks are also known to waive processing charges for select customers.

Experts point out that banks and financial lenders bear a high acquisition cost for all retail loans. Hence, the best way to create cost efficiency is to retain good customers. Besides, your savings back account is the cheapest source of funds for banks. banking is undergoing a transition from product-oriented to customer-oriented strategies. It is prudent to have a total relationship approach, including revenue, loyalty, long-term association and engagement with the customer. Since preferred customers are a very important part of this strategy, we look at the relationship holistically and offer relationship-based prices across most products.

Cross-selling is another tactic used to foster loyalty while making money from an existing customer. Banks are constantly endeavouring to increase their wallet share in terms of multiple offerings to good customers, So some banks offer their liability-free customers special interest rate and fees when they come back for loans. According to him, the cross-sell ratio on loans in India is 1:2, whereas in developed countries, it is 1:5. The potential, therefore, is huge and banks are expected to step up their cross-selling drive in the years to come.

Is loyalty the only criterion?

Just being loyal, unfortunately, is not good enough when it comes to preferential interest rates. "Banks evaluate the profile and creditworthiness of a customer to decide on the discount that can be passed on," says Raj. Moreover, banks have a standard set of pricing for customer segments based on the risk parameters and historic behaviour of the product portfolio. Within the range specified in the product programme guidelines, we use our discretion and prudence in providing risk based and overall customer relationship pricing.

As mentioned earlier, the differential interest rate regime is based on the customer profile. The loyal customers eligible for preferential rates are chosen according to their employment and risk profile. Most banks have segregated companies into categories, such as super Cat A, Cat B, Cat C, etc. This categorisation is reviewed periodically based on the relationship they have with these companies. Today, the interest rates and fees on loan products are driven by the category in which a customer's workplace falls.

The risk profile of a customer is typically determined using his or her credit score maintained by the Credit Information Bureau India Limited (Cibil). If a customer has no credit background but his details are available with Cibil, he gets a score of -1. The score is zero when the credit history is less than six months old. Lastly, one can earn a score of 300-900 depending on factors such as repayment record, default record and credit mix.

A person with a score of over 700 can negotiate with the bank for lower interest rates or a waiver of the processing fee. What follows is that you'll need a high score to get preferential treatment.

The bottom line is that banks are increasingly rewarding loyal customers. So if you are into multi-banking, perhaps it's time to consider placing all your eggs in one basket. However, this should not prevent you from shopping around for the best deals, if only to give yourself more negotiating power with your bank.

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