HFCs lending below base rate gives them unfair edge: SBI

Banks aren't allowed to lend below benchmark; SBI bats for teaser loans, ICICI says no

State Bank of India chairman Arundhati Bhattacharya believes that the housing finance companies have an edge over banks as they are  allowed to lend below the benchmark prime lending rate, which disrupts the level playing field. This is because banks are now allowed to lend below the base rate, which is the benchmark used by banks for pricing loans.

"There is a regulatory arbitrage. But regulators say they (HFCs) get resources at higher cost than banks. There are pros and cons to both of them. But how do you equate it to having a level playing field," said Bhattacharya.

She also added that regulatory arbitrage leads to undue advantage to select players. "If you have a particular area that you are operating then there  should be level playing field so that most efficient of them do the best job."

Bhattacharya once again made the case for variable interest loans or popularly known as teaser loans. In this the interest rate is fixed for the first one to three years and is much lower than the standard rate.

"I still believe there is a place for such loans. Variable equated monthly installments definitely makes things easier for home loans borrowers," she added.

However, some other bankers are not enthused with the idea of teaser loans as they believe that the customers are not fully aware of the quantum of EMI that they have to pay after the 1-3 years period lapses. Also, in the initial years, the maximum outgo is on interest and, therefore, the quantum of loan repayment remains very small. There is always a fear in the system that it can end up leading to defaults after the interest rate moves up.

"We have always been preferring standard rates where the customer is aware from day one what the rate is. And compared to any other enticing options, we believe that offering standard rates where rates remain uniform throughout the life of a loan is a much better proposition," said Rajiv Sabharwal, executive director, ICICI Bank.