RBI express its concern over teaser rates

The RBI deputy governor Usha Thorat told that the central bank has made its viewpoint clear on teaser rates on home loans, and it expects banks to take required action on it.

When asked about further action of regulatory regarding teaser rates, Ms Thorat while speaking on the sidelines of a finance conference said, “Banks should have taken whatever message was given.”

The central bank has communicated its concern over teaser rates twice in less than 30 days. Last month, in the second week of January, Ms Thorat while warning banks had said, “Teaser rates are increasingly being offered which is a cause for concern.”

Last week, another deputy governor, KC Chakravarty had also highlighted RBI’s concern over the lack of uniformity in rates being offered to different customers of the same bank. Under teaser rates the pricing structure of loans is stepped up where banks offer a low fixed rate of interest in the initial years of the loan.

After initial years, i.e. 2-3 years of the disbursement of loan, the bank set the interest rate on the loan to the prevailing rates in the market. As going by this, if the interest rate does not change, the borrower will end up paying a higher rate of interest after the fixed rate period comes to an end. Such promotional offers are more common overseas.

But in India, it is first time the banks have launched such schemes. Banks launched these schemes as credit demand had failed to take off. Although the schemes were launched in early 2009, but as per data the improvement in loans could be seen only after mid 2009.

The annual y-o-y loan growth, in mid –May had touched to around 5%, had increased to over 7% by mid-Novemenber 2009, according to the latest RBI data. This year still the loan growth is low in comparison to the growth registered in the year-ago period during which home loans had registered a growth of 9.1%.

On the other hand RBI’s concern about teaser loans can probably be linked to the crisis in the US sub-prime mortgage market that mounted into a major global crisis which led to the failure of the entire banking system in the western hemisphere.

But the bankers in India think that RBI concern may be uncalled as at the time of processing of loan the repayment capacity is assessed on the overall liability and not on the first year’s rate

Recently many leading lenders, including SBI, ICICI Bank, Canara Bank, PNB and HDFC have launched such special offers with an aim to attract borrowers as the loan demand from individuals and industries has been quite moderate.