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India’s banking regulator — the Reserve Bank of India (RBI) — has expressed concern on banks offering home loans with teaser rates, or schemes where monthly instalments rise after the initial years. Its worries stem mainly from the fear that borrowers may subsequently find it tough to repay the loans once interest rates go up after the first couple of years during which the rates are pegged at a fixed rate. “Teaser rates are increasingly being offered which is a cause for concern,” said Usha Thorat, deputy governor, RBI, at a banking conference here. “I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal.”
RBI’s concern can perhaps be traced to the fact that the genesis of the mortgage crisis in the US lay in home loans extended to borrowers who struggled to repay. These loans, popularly known as sub-prime loans because they were given to people in lower income groups, included so-called adjustable rate mortgages where the repayment is low in the initial months with instalments rising in subsequent months, somewhat similar to teaser rates.
Lenders in India, however, say there is no cause for concern as far as quality of lending is concerned since repayment capacity is assessed based on the overall liability and not the first year’s rate. Many leading lenders, including the State Bank of India (SBI), ICICI Bank, Canara Bank, Punjab National Bank and Housing Development Finance Corporation (HDFC), have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.
These schemes have a fixed rate — mostly between 8-8.5% — for the first two to three years of their tenure. But they turn into market-linked floating rates soon after, making them equivalent to any other home loan. Bankers say they have seen a perceptible improvement in disbursals after launching such schemes. MV Nair, chief of Indian Banks Association, an umbrella body of all banks in the country, said RBI was right to seek greater transparency from banks on such loans. He appealed to banks to better educate customers about the various implications of special rates. Mr Nair is also the chairman and managing director at Union Bank of India, a state-owned lender that has been offering special rates as part of a government scheme to encourage retail borrowers to avail of home loans.
OP Bhatt, chief of the country’s largest lender, SBI, however, said the rates for special loans remain below the cost of funds for most banks and so they do not necessarily have any special effect on bank finances. “It is not that because it is priced lower there is higher chance of non-performing assets. It’s not lower than our cost of funds and we have other products priced at similar rates,” Mr Bhatt said. Analysts say the average cost of long-term funds for Indian banks is in the range of 5-6%.
The government-owned SBI was one of the first Indian banks to sell mortgages at special lower rates in early 2009. “Excess liquidity in the system has once again led to the familiar phenomenon of sub-PLR short-term lending; banks would do well to recognise re-pricing and rollover risk,” said Ms Thorat. PLR stands for Prime Lending Rate, a bank’s individual benchmark rate around which a borrower usually negotiates her rates. |
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