RBI asks banks to keep more money aside for teaser rates

Concerned over teaser home loans, the Reserve Bank today asked banks to keep more money aside for offering such a product to provide cushion for any default.

Teaser home loans are provided by some banks like industry leader State Bank of India to offer the product at low interest rates for initial years, which RBI said has the risk of some defaults after interest rates rise for later years.

"This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective," RBI said in the second quarter review of its monetary policy for FY'11.

According to the apex bank, some banks do not take into account the repaying capacity of the borrowers at normal lending rates at the time of initial loan appraisal.

"In view of the higher risks with such loans," RBI said that it is proposed "to increase the standard asset provisioning by commercial banks for all such loans to 2 per cent."

Currently, provisioning is 0.4 per cent. The RBI's direction to the banks on provisioning would make home loan slightly expensive.

Many banks introduced concessional home and auto loan beginning October to cash in on festive fervor. The teaser rates for both housing and car loan varies between 8-9 per cent. Most of the banks have said that such concessional rates would be valid for December 31, 2010.

Besides, RBI also directed banks loans should not exceed 80 per cent of the value in order to secure assets of the lender in case of default.

RBI said that presently there is no regulator cap on the loan to value ratio (LTV) in respect of their housing loan exposures.

Henceforth, the LTV ratio in respect of housing loans should not exceed 80 per cent, it said, adding this would prevent "excessive leveraging."

The apex bank has also increased the risk weight for residential housing loans of Rs 75-lakh and above, irrespective of the LTV ratio, to 125 per cent from exiting 100 basis points.