Foreign banks offer dual-rate products

To attract home loan borrowers but say these are quite unlike RBI's disliked teaser offerings

Amid rising interest rates, foreign banks in the country are making an effort to attract home loan borrowers by introducing dual rate or fixed-cum-floating rate products.

The top four foreign lenders in India – Standard Chartered Bank, Hongkong and Shanghai Banking Corporation (HSBC), Citibank and Deutsche Bank – have rolled out home loan products in recent months that offer a fixed rate of interest for an initial period before the rate becomes variable.

They say these are not similar to the ‘teaser rate’ home loan schemes that had raised asset quality concerns, being far more transparent.

“We are not teasing the customers. The fixed rate offered is at par with the market rate. Customers are also made aware of the floating rate spreads at the time of making the agreement. The loan pricing is transparent and our dual rate product is different from those teaser rate schemes,” someone in charge of mortgage business of one of the foreign banks, said requesting anonymity.

Bankers also said the new fixed-cum-floating rate products do not attract the additional provisions mandated for teaser rate schemes.

In 2010, the Reserve Bank of India had increased the standard provisioning requirement by five times, to two per cent from 0.4 per cent for teaser loans. The regulator was concerned at the practice of banks sanctioning housing loans at comparatively lower rates in the first few years and then resetting these higher. It felt some borrowers might find it difficult to service the loans once the rate was revised upwards.

The discomfort of the central bank and additional provisioning requirement prompted lenders, including State Bank of India (SBI), to withdraw such products. SBI was the first bank to offer such a product, in January 2009.

“The regulator's discomfort was that banks were offering low rate of interest in the initial years to get customers and then revising these higher. In our case, the fixed rate is at par with the market rate. So, we are not enticing customers with a low rate in the initial years,” said another official with a large foreign bank.

“The eligibility is decided after reviewing the repayment capacity of the borrower. We are sanctioning the dual rate loans only if we find that the borrower is capable of servicing it even at 50 basis points (bps) over the fixed rate,” said the mortgage head of the foreign bank mentioned earlier.

According to bankers, the dual rate schemes were introduced following a demand from their clients for a housing loan product that offers a fixed rate at least in the initial years.

“Many of our customers are high net worth individuals, who are aware of the current market situation. They expect interest rates to rise in the near term but also feel these rates will come down in the medium term. Hence, there was a demand for a product offering a fixed rate for at least one or two years and floating rates thereafter,” said a banker.

Citibank has introduced a dual rate home loan product, where it is offering a fixed rate of interest, at 10.25 per cent, for two years. Borrowers will have to pay an interest at the base rate plus 100 bps after the expiry of the fixed period. The offer is available for the bank's new and existing customers.

HSBC is also offering home loans at a fixed rate for one year and a floating rate thereafter. Deutsche Bank is offering its clients fixed rate home loans for one, two and three years, after which customers are given an option to choose either a fixed or floating rate. Standard Chartered Bank has introduced a similar product.

Some Indian lenders, including the country's largest mortgage entity, Housing Development Finance Corporation, already offer dual rate home loan products.