NHB may ease provisioning norm for teaser home loans

Additional provisioning may apply only to new loans and not the entire portfolio.

The National Housing Bank (NHB) may revise its earlier direction on higher provisioning for special home loan schemes (popularly known as teaser loans).

NHB regulates housing finance companies (HFCs) like HDFC and LIC Housing Finance.

According to sources, the additional provisioning may apply to only new loans under these schemes, not the entire outstanding portfolio, as earlier directed.

“NHB will take into account the arguments of HFCs and if it is understood that loans outstanding under these schemes were not under-priced (as was originally perceived), then only modifications will be made, where only fresh loans will attract higher provisioning,” a senior NHB official said.

NHB has called a meeting with the chiefs of HFCs to discuss the issue. HFCs, taking a cue from State Bank of India’s resistance to the Reserve Bank of India’s (RBI’s) attempt to rein in banks from continuing teaser loans, had sought clarifications on NHB’s move to increase provisioning on teaser loans to two per cent from 0.4 per cent.

According to an NHB circular, this additional provisioning had to be made on the entire portfolio under special home loan schemes. The rationale was that such rates weren’t reflecting the risk perception. And, as these schemes had low interest rates in the initial years, they weren’t taking into account the borrowers’ ability to pay in future should the rates go up, said an HFC official.

However, HFCs contested this. “They argued that the loans were priced in accordance with the cost of funds and were approved taking into account the borrowers’ future income flow,” said a senior official at a Mumbai-based HFC.

“In our case, under the special home loan scheme, 9.75 per cent is the fixed rate for the first five years. It was fixed taking into account our own cost of funds and borrowers’ ability to pay,” said LIC Housing Finance CEO V K Sharma. “We will be comfortable with our margins at 9.75 per cent.”

In November, RBI, in its credit policy review, had asked banks to ensure higher provisioning on teaser loans. However, SBI, the largest lender in the country, sought clarifications from the regulator and did not make additional provisions for these loans in its third quarter results.

R V Verma, chairman of NHB, confirmed the development, saying, “We might reconsider the proposal of HFCs, provided it falls under the definition of the directive.”

Adding: “Interest rates must reflect the risk perception and the cost of funds. Since these are long-term loans, future interest rates cannot be predicted. Risks should be properly priced and borrowers’ ability to pay taken into account.”

He said the main agenda of the coming meeting was to take an account of the functioning of HFCs and discuss the interest rate scenario.