Banks ask RBI to define teaser loans

Even as Corporation Bank has decided to be the first one to withdraw teaser loan schemes, others led by the State Bank of India (SBI) have asked the Reserve Bank of India (RBI) to define teaser loans.

Stung by the public criticism of teaser rates, SBI Chairman O P Bhatt told RBI officials in a post-monetary policy meeting on Friday that only eligible persons are given these loans and the norms are not diluted while extending such loans.

Moreover, he said, the teaser rate concept of the advanced economies could not be equated with what SBI was offering.

Investopedia describes teaser loans as "an aspect of subprime lending, as they are usually offered to low-income home buyers. Unfortunately, when these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages.This leaves borrowers with increased monthly payments, which many cannot afford. This method of loaning is considered risky, as the default rates are high".

However, SBI said that was not true in the Indian context. The home loan scheme of SBI charges eight per cent interest for the first year, nine per cent for the second and third year. From the fourth year, the loan rate gets linked to the bank's base rate.

"SBI wants the central bank to define what can qualify as a teaser loan," a person who attended the meeting said.

Bhatt had earlier expressed his displeasure over RBI terming a teaser rate as a dual rate scheme and said "nobody was teasing anyone".

The central bank had called a meeting of select bank chiefs to take their views regarding the policy announcements made during the second quarter review of the annual monetary policy earlier this month.

RBI had increased the standard asset provisioning for dual rate loan schemes five times to two per cent - a move seen as a clampdown on teaser loan products.

SBI, which pioneered the teaser loan concept in the country, also said higher provisioning would mean that a bank would have to set aside a higher amount from its profits, which in turn would affect the bottom line adversely. Punjab National Bank is another bank which has teaser loan products.

Bankers sought clarity from the regulator whether two per cent provisioning was required to be done during the entire tenure of the loan or till the time fixed rates were offered. Without the clarity, bankers said it was difficult to estimate the amount of provisioning.

Interestingly, RBI is yet to issue a circular effecting the increase in the provisioning requirement for teaser loans, even after nearly a month from the announcement.

Apart from Bhatt, ICICI Bank Managing Director and CEO Chanda Kochhar and HDFC Bank Managing Director Aditya Puri attended the meeting. The central bank was represented by deputy governor Shyamala Gopinath along with executive directors and chief general managers.

SBI launched the teaser home loan scheme in February 2009 when the country was fighting the trickle-down effect of the global financial crisis.

The scheme, which was initially launched for a few months, became hugely popular and as a result SBI went on to extend the scheme.

From SBI's point of view, the loan product was introduced to boost demand during the downturn.

However, RBI feels floating rate loans for a very long tenure pose a risk because it is not possible to predict interest for a very long period.

Corporation Bank has decided to withdraw it prematurely from November 30. The scheme, which was launched in October, was scheduled to be offered till December 31.