Leading banks have challenged the Reserve Bank of India’s decision to curb ‘teaser home loans’ which banks have aggressively sold to thousands of borrowers who found the low interest rates during the initial years irresistible.
State Bank of India(SBI), has said its ‘special home loan scheme’ is not a ‘teaser loan’. “It (RBI) has not defined what it means by a teaser loan,” said SBI chairman OP Bhatt. SBI was the first bank to launch such loans where the interest rate is lower for the first few years after which it is reset.
RBI raised the standard provision on such ‘teaser loans’. The regulator has asked banks to set aside more capital on home loans above `75 lakh and restrained banks from lending more than 80% of the value of the home. However, most bankers said they will not review home loan rates during the festival season when demand is high.
RBI raised the standard provision on teaser loans from 0.40% to 2% on the ground that some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. A higher provision means lower income for banks.
SBI, which has RBI deputy governor Shyamala Gopinath on its board, was the first bank to launch teaser loans — a product which was criticised by Deepak Parekh, chairman of the mortgage giant HDFC which later floated near-identical products.
According to Mr Bhatt, the bank sanctions loans only after doing a proper due diligence of borrowers’ repayment ability. Besides SBI, Punjab National Bank , Corporation Bank and ICICI Bank offer loans where interest rate is comparatively low during the initial years. These banks have also said they will continue with special rates till December 2010.
Speaking to the media, Mr Bhatt said the bank would review its scheme in the last week of December while RP Pradeep, CMD of Corporation Bank, said the asset liability committee of the bank will take up the matter.
While countering the RBI argument that teaser loans are risky for banks, it was pointed out that the risk on borrowers’ inability to repay would remain even in floating rate loans once rates move up sharply. RBI’s decision to cap the loan to value ratio at 80% will affect ICICI Bank, the country’s second-largest lender, which has given loans up to 90% of the property value.
It will also impact the recently launched 90-10 property schemes, where borrowers pay 10% of the amount upfront and the balance is borrowed from banks who recover the interest cost during the construction period from the builder. The central bank has raised the risk weightage — the capital that banks have to set aside on every loan — for loans above Rs 75 lakh for residential projects.
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