SBI to seek lower provisioning for special home loans

Bank to argue with the Reserve Bank that new norms don’t apply to floating rate schemes.

A day after tweaking its ‘teaser rate’ scheme for home loans, the State Bank of India has decided to seek the regulator’s approval to make only 0.4 per cent provisioning instead of the newly prescribed two per cent for such schemes.

A letter is to be sent to the Reserve Bank of India (RBI) next week for approval, senior bank executives said. The logic for seeking an exemption for RBI’s new provisioning norms, announced in the monetary policy, is that the modified scheme is so based that the ‘interest rate will increase or decrease in tandem with changes in the base rate during the loan term’.

The new special home loan scheme, announced by SBI late on Friday evening, was described by many bankers as a masterstroke from SBI Chairman O P Bhatt. It came at a time when many thought the bank would allow teaser loans to lapse, as so many of its competitors had done, in the face of regulatory disapproval.

SBI executives said the new formula has tried to solve most of the issues raised against the scheme. “The new scheme maintains the flexibility to retain the attractiveness of the product (low interest rate), yet it allays the regulator’s concerns.”

One, since the rate of interest is linked to the base rate, it is no longer fixed. So, if there were further pressures on the base rate, the home loan rate will automatically go up. Two, it does not need to make higher provisions for its home loan scheme. The best part: Customers will continue to get a concessional rate for the first three years.

The latest scheme is interesting for many reasons. For loans up to Rs 30 lakh, the new rate is 150 basis points above the base rate. But the borrower will get a concession of 100 bps in the first year and 25 bps in the second and third years. The effective rates: 8.5 per cent in the first year, 9.25 per cent in the second and third years.

In comparison, the teaser rate scheme was offering eight per cent in the first year and nine per cent in the second and third years. In fact, the difference between the rate in the first year and second and third years has come down from 100 basis points to 75 basis points.

For loans above Rs 30 lakh, the effective rate in the first year will be 8.5 per cent as well, but the concession will be 50 bps for the second and third year. In other words, while rates were fixed earlier, concessions have now been fixed.

Said a private sector banker, “After the RBI’s hike in provisioning from 0.4 per cent to two per cent for dual rate schemes, it was expected that SBI would also stop the teaser rate scheme.” There were no reasons to believe otherwise. HDFC and ICICI Bank, both big players, had scrapped their teaser rate schemes a few weeks before.

In November, RBI had proposed to raise the provisioning for teaser loans. Following this, HDFC chairman, Deepak Parekh, had said that teaser rates should die down, but only when it is done “universally” (meaning SBI should stop it).

The first round of the teaser rate battle was won by RBI when it raised provisioning norms to deter banks from continuing it. Bhatt’s latest scheme may save provisioning cost and yet teases customers. It remains to be seen if round two would go to him.