RBI voices concerns over teaser rates; SBI defends

The Reserve Bank of India (RBI) today expressed concern over banks offering 'teasing' home loan rates to outsmart each other but State Bank of India (SBI), which started it off last year, stoutly defended saying low rates helped rekindle demand.

"Teaser rates by banks is a cause of concern. Banks must ensure that borrowers can service higher rates when rates return to normal," RBI Deputy Governor Usha Thorat said at the Bancon conference here.

State Bank Chairman O P Bhatt was quick to defend the practice of offering lower rates in the first few years saying special home loan rates have helped revive the demand for housing loans.

SBI was first to come up with special schemes (teaser) under which home loans were offered at 8 per cent for the first year of credit period. It was a roaring success and even rivals like HDFC, which initially termed the strategy as "gimmick" followed SBI steps. Others like ICICI soon joined the bandwagon, sparking a rate cut war.

"The entire industry has lower rates. If it was something which was not doable, no bank would have followed it...Customer has an advantage (under the special scheme).... As far as our home loans are concerned, customers have an option to opt for either fixed or floating rates after the offer period... There are no hidden costs," Bhatt told reporters.

There has been apprehensions that borrowers would find it burdensome when interest rates are reverted to normal rates.

Bhatt said when SBI launched the scheme early last year, credit off take was almost nil and housing sector was on a standstill. "There was no credit off take in the market and minimum activity in the housing segment. By doing this, market came back, buyers came," Bhatt said.

Answering to a question, Bhatt said SBI did not have any pressure from the Government to continue with the scheme. Also, SBI's interest margin has benefited from the credit disbursal under this scheme, he said.

"There has been no pressure from the government... There was a desire from consumers to continue it...Our margins have improved. Instead of keeping the money at 3.25 per cent with the Reserve Bank, we are getting 8 per cent (from the loans)," Bhatt said.