Despite modifying its teaser home loan scheme, State Bank of India (SBI) may have to make higher provisions for such loans as interest rates in the first few years will still be lower than in the following years. To escape higher provisioning requirements, the country's largest bank modified its special home loan scheme on Friday. It did away with the fixed rate and decided to offer a fixed discount instead. However, the rate would still react to changes in the base rate.
Sources in the Reserve Bank of India (RBI) said the scheme still amounted to what the central bank classified as a teaser scheme, that is, it charged a lower rate in the initial years. Thus, loans under the scheme would attract higher provisioning.
During the second quarter review of its annual monetary policy, RBI had asked banks to increase provisioning for all teaser loans to two per cent - a five-fold increase. Currently, SBI's card rate for home loans below Rs 30 lakh is 150 basis points above the base rate (eight per cent).
However, in the first year, it will give a discount of 100 bps to new customers. In second and third years, the discount will be 25 bps. The product would be offered till March 31. The previous scheme offered eight per cent in the first year and nine per cent in the next two.
"It has been observed that some banks are sanctioning housing loans at teaser rates, that is, at comparatively lower rates of interest in the first few years, after which the rates are reset higher. In view of the higher risk associated with such loans, the standard asset provisioning on the outstanding amount has been increased from 0.40 per cent to two per cent, with immediate effect," RBI had said.
After rates were reset higher, the provisioning will return to 0.4 per cent a year if the account remains standard.
Launched in early 2009 to deploy excess liquidity, SBI's scheme led others to follow. However, once RBI decided to increase provisioning, lenders like Punjab National Bank, Housing Finance Development Corporation and Corporation Bank withdrew their schemes.
A higher provisioning will translate into setting aside a larger amount from profits, which will, in turn, hit banks' bottom lines. According to analysts, SBI may have to provide Rs 350 crore for teaser loans.
Other lenders are not too impressed with SBI's latest version. Banks and home loan companies said they would decide their moves within the next few days.
"It's a little early to take a view. Whether to follow suit or not, we will decide by the end of the week. The cost of funds is rising. Interest rates are going up. We have to take all these parameters into consideration," said an HDFC official, adding the new product from SBI was not much different from the old scheme.
A senior Corporation Bank executive said the bank would take a call in a week. "We may not follow SBI. We will come out with a different product," he said.
The central bank's discomfort with teaser rates is at least on two counts. First, it thinks such schemes flare up real estate prices. Also, some borrowers may find it difficult to service the loan once rates are reset at higher levels. It has been observed that at the time of initial loan appraisal, many banks do not take into account the repaying capacity of the borrower at normal lending rates.
"Such schemes point to flawed risk management practices. An existing borrower, servicing the loan for many years, with his credit history firmly in place with the bank, pays a higher rate compared to an unknown borrower who may be availing of a loan from the bank for the first time," said an RBI official.
