SBI's second tryst with Teaser loans

Pitch for home loans below base rate; first time went aggressive on lending below prime rate lending was in late 2008

Country’s largest lender State Bank of India’s pitch to allow it to hawk home loans at rates below base rate will be a second time tryst with “teaser loans.

First time it went aggressive on lending below prime rate lending was late 2008 soon after global financial crisis (GFC) in September that year to avoid adverse effect on Indian economy.

It was banking industry initiative under aegis of Indian Banks’ Association (IBA) in December 2008 with blessings from the UPA government to avert any adverse fallout of on Indian economy and also give push for demand.

There were no restrictions then from regulator Reserve Bank of India on lending below benchmark rates. The reference rate used by each bank to price loan that time was Benchmark Prime Lending Rate.

O P Bhatt, then SBI chairman, led the charge to hawk loans big time under two special interest loan schemes. These loans had the interest rates fixed and below the market rate in the initial years (Three years). Thereafter the rates were expected to move to higher and floating interest rates. SBI always maintained that loans were given only after making through check on repayment capacity.

The response schemes were very good. The number of loans offered in January 2009 was 18,780 with an aggregate value of Rs 1,499 crore. By November 2009 this had risen to 28,492 loans with an aggregate value of Rs 3,273 crore. 



With many banks emulating SBI, the portfolio of such special loans begun to swell, is prompting banking regulator to flag risks.

Usha Thorat, then deputy governor at RBI said Indian banks need to ensure that customers who borrow at special loan rates will be able to service the debt when interest rates rise.

Teaser rates do cause a concern. Banks should ensure that income of borrowers is adequate to service the loan when recovery picks up and interest rates return to normal levels, Thorat had said.

RBI may have had reservations about products, but the Government of India heaped praise on SBI for success of schemes in its economic survey for 2010-11.

Defaults on these have been negligible and cases of foreclosure rare. Also, these loans played a major role in promoting inclusiveness. Around 90% of the home loan borrowers were first-time home buyers, government said.