How RBI's credit score rules can reduce home loan cost
What's the story
RBI has introduced new guidelines that could help borrowers lower their home loan interest rates. The changes, which came into effect on October 1, 2025, allow banks to revise the spread charged for a loan category before three years. This is based on justifiable grounds and in a non-discriminatory manner. The move is aimed at customer retention and could benefit those who have improved their credit scores after taking out a floating interest rate loan like a home loan.
Mechanism
How can improved credit scores lower loan interest rates?
Under the new RBI guidelines, if a borrower's credit score improves, their debt burden decreases, or they become a less risky customer, they can request an interest rate cut on their loan. The bank will then conduct a credit assessment to see if there has been a significant change as per the loan contract. If so, it will reduce the credit risk premium charged on the loan. This would ultimately lower the interest rate and save money for borrowers.
Breakdown
Understanding the components of bank-determined interest rates
The interest rate determined by banks is made up of two parts: a benchmark rate and a bank spread on it. The external benchmark rate can be the RBI's policy repo rate, Government of India (GOI) 3-month or 6-month treasury bill yield, or any other market-based interest rate published by Financial Benchmarks India Private Limited (FBIL). The bank spread includes factors like margin, operational costs, credit risk (determined through borrower's credit score and profile), loan tenure among others.
Impact
RBI's guidelines encourage borrowers to request interest rate reductions
The RBI's new directions are not automatic, meaning borrowers will have to take the initiative to approach their bank for a reduction in interest rates. Previously, existing borrowers had to wait for a three-year lock-in period before their credit assessment could be conducted by the bank for an interest rate reduction. However, these new guidelines have removed that waiting period and allowed immediate requests if there is a significant improvement in their credit score.
Savings potential
How much can borrowers save with lower interest rates?
A lower interest rate on a home loan can lead to significant savings over the long term. Even a small reduction of 0.25% in interest rates could amount to substantial savings for borrowers, especially those with long tenures of 20-25 years and high-value loans between ₹25 lakh and ₹75 lakh. The RBI's new guidelines are likely to motivate borrowers to improve their credit scores so they can benefit from reduced loan interest rates.