Banks Expected to Take Action over RBI’s Concern on Home Loan Rates

February 8, 2010	(Be the first to rate this story!)  Loading ...
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RBI deputy governor Usha Thorat has said the central bank has made clear to banks its thoughts on teaser rates on home loans, and banks are expected to take action. Speaking on the sidelines of a finance conference on Monday, Ms Thorat said: “Banks should have taken whatever message was given,” when asked about further progress on the regulatory front on teaser rates. The central bank has flagged of its concern over teaser rates twice in less than 30 days. Last month, in the second week of January, Ms Thorat had warned banks: “Teaser rates are increasingly being offered which is a cause for concern,” she said.

Last week, another deputy governor, KC Chakravarty, had highlighted RBI’s concern about the lack of uniformity in rates offered to different customers of the same bank. Teaser rates refer to a step-up pricing structure on loans where banks offer a low fixed rate of interest in the initial years of the loan. However, after 2-3 years of the disbursement, the interest rate on the loan gets aligned with the prevailing rates in the market. What this means is that if the interest rate environment does not change, the borrower would end up paying a higher rate of interest after the fixed rate period comes to an end. Such promotional offers are common internationally.

However, in India, it is only recently that banks coming out with such schemes. Banks have come out with such schemes since credit demand has failed to take off. Though the scheme was launched in early 2009, data suggests that loans started showing some perceptible improvement only after mid-2009. The annual YoY loan growth which had touched to around 5% in mid-May improved to over 7% by mid-November 2009, according to the latest RBI data. However, loan growth so far this year is still lower than the growth registered in the year-ago period during which home loans registered a growth of 9.1%. RBI’s concern about teaser loans is perhaps largely linked to the crisis in the US sub-prime mortgage market that snowballed into a major global crisis that triggered the failure of the entire banking system in the western hemisphere.

Lenders back home, however, feel that this concern may be uncalled for. This is because, as far as the quality of lending is concerned, repayment capacity is assessed on the overall liability and not on the first year’s rate. Many leading lenders, including SBI, ICICI Bank, Canara Bank, PNB and HDFC have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.

News Published Under:   Real Estate India, Home Loans |

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