RBI, SBI at odds on teaser rates

The Reserve Bank of India and the country’s largest bank, State Bank of India, today differed on the desirability of teaser loans.

While RBI Deputy Governor Usha Thorat told reporters after the monetary policy announcement that teaser rates push up home prices, SBI Chairman O P Bhatt said such schemes helped create demand when the economy was passing through a rough phase.

RBI today took steps to discourage teaser loan rate schemes, which have a fixed component initially before becoming floating, in order to rein in “loose practices in pricing of risks in the housing sector”.

Thorat said floating rate loans for a very long tenure pose risk because it is not possible to predict interest for a very long period. In case of teaser rate loans, they are not pure floating rate loans because they have got a concessional initial fixed period and then it resets on to a floating rate. So, the lower interest rate in the beginning actually lures borrower to take loans.

“So, this itself has the making of leveraging and putting pressure on housing prices to move up. The increase in housing prices and its implications has a systemic angle,” she added. RBI also said that competition drives all the players to offer such a scheme and the problem aggravates.

On his part, Bhatt questioned the rationale of calling such schemes “teaser”. “I don’t know why they call it teaser rates. Nobody is teasing anybody.”

According to Bhatt, the loans have become very popular, as all the new customers are availing the special loan schemes only. This has also helped SBI to acquire new customers, he said.

“The special home loans, if we may call them that, was first introduced by SBI. This was done at a time when there was literally no credit offtake and cost of funds was low. In that context, we thought it was an appropriate scheme.”

Bhatt explained that the interest rate charged in the first year is lower than a customer’s loan repayment capacity. After one year, a customer’s income goes up and his ability to service the loan also increases. SBI did not dilute the eligibility criteria while giving home loans, he said.

Home loans constitute 13 per cent of SBI’s loan book.

Some banks, however, welcomed the RBI move on the ground that it will put a check on home prices.

“The move to increase the provisioning requirement of teaser home loans was done in view of the considerable bullish developments of real estate prices,” said S Raman, chairman and managing director of Canara Bank.