Teaser loans to get expensive

Banks may review their pricing strategy; may discontinue the product.

In the second quarterly review of the credit policy, the Reserve Bank of India (RBI) further tightened the noose around teaser-rate home loans. The apex bank has increased the standard asset provisioning by commercial banks to two per cent from 0.4 per cent, a rise of 160 basis points. It wants the banks to keep more money aside for teaser home loans as a cushion, in case of defaults.

“It has been observed that many banks, at the time of initial loan appraisal, do not consider the repaying capacity of a borrower at normal lending rates,” says RBI.

Teaser or dual housing loans are given at a low rate of interest in the initial years, after which the rates are revised upwards to the applicable floating rate. RBI believes some borrowers find it difficult to service the loans once the floating rates become applicable (higher than the rate in the initial years).

Banks, however, do not agree. O P Bhatt, chairman, State Bank of India (SBI), says, “If the customer is eligible for the loan at the start, his ability to service the loan only improves going forward, because of pay hikes. The teaser loans also proved to be a good strategy to attract customers, since they then opened saving accounts, bought mutual funds, etc in the bank.”

Existing customers
Industry experts do not see any significant impact on the existing teaser loan borrowers. “Existing customers of the teaser-rate home loans will not be impacted, as banks disburse the loan after an agreement, which cannot be violated,” says Sushil Munot, executive director, IDBI Bank.

Bankers say there are two ways of countering higher provisioning. By reducing the deposit cost, the loan pricing also decreases. But pricing cannot be controlled this way, as the deposit cost has been rising. The other way is to raise interest rates.

“But, this does not mean the mark-up, or the rate charged above the bank’s base rate, will increase. We can only tinker with the base rate, and we need time to calculate it, as the base rate is linked to the bank’s cost of funds and credit tenure,” says a senior SBI official.

According to Harsh Roongta, CEO, Apnapaisa.com (a price and features comparison engine for loans, insurance and investments), banks will find it difficult to increase the mark-up for calculating the interest rate, once the borrower shifts to the floating rate due to their contractual agreement. They can’t raise the interest rate unilaterally, Roongta adds.

New customers
Experts say higher provisioning for teaser rates will pressurise the profit margin of banks, leading to teaser rates becoming more expensive. They feel banks may not be able to offer these products for long. “Either you suffer losses due to the unaffordability of the product or you cease it,” says R R Nair, managing director & CEO, LIC Housing Finance.

“The future of the product will mostly be governed by SBI’s actions. If SBI withdraws the product, others may follow suit,” adds Roongta. He advises new customers to not hurry and wait for further clarity on the product and banks’ next move, before taking any decision.

To counter higher provisioning on such products, banks may look at compensation by way of raising the processing fee on new teaser loans. “The market has accepted the product very well. And, in order to let it continue, we will have to re-look at the pricing strategy of new loans,” says the SBI official.

Loans from non-banking finance companies such as HDFC and LIC Housing Finance will not be impacted, as they fall under the purview of the National Housing Bank (NHB). And, there are no provisioning norms for standard assets set by NHB.