All public sector banks which have announced repo linked home loans will have to rework their products after Reserve Bank of India (RBI) guidelines issued earlier this month disallowed setting any income criterion.
The scheme, the central bank said, should be open to new home borrowers. Banks say there is an inherent risk in opening up such a product to all customers considering that there is an interest rate risk.
After disbursing about Rs 2,000 crore worth of loans under its repo linked home loans, State Bank of India has recalled the scheme, saying it is not affordable to extend it to customers without an income criterion. Those who have taken the loans under this scheme will continue at the same rates of interest. SBI was the first bank to launch a repo linked home loan for borrowers with an annual income of Rs 6 lakh and above in July.
However earlier this month, Reserve Bank of India came out with elaborate guidelines on the need for banks to link all their new retail loans and micro small and medium enterprise loans to an external benchmark. SBI's repo linked home loans were open only to people with a certain income level, though its savings deposits continue to remain linked to the repo rate with a floor rate of 3%.
A senior SBI official, "According to RBI's circular we cannot keep any conditions like an income criterion, etc, it should be open to all new home loan applicants. The external benchmarks can get very volatile and borrowers in the lower-income groups may not be able to afford higher equated monthly installments (EMIs) when interest rates go up."
The repo rate loan of the bank had a tenure of 30 years. "So the interest rates are bound to reverse during such a long tenure, which may hinder the borrower's repayment capacity," the SBI official said.
Rating agency Moody's said last week that repo linked loan products are credit negative for Indian banks and will limit their flexibility in managing interest rate risk.
Following SBI's footsteps, almost all banks had launched a repo rate linked home loan rate. All these banks may revisit their plan after SBI's experience.
SBI is seeking clarifications from RBI on the eligibility criteria. The bank is also planning a fixed rate home loan for borrowers who want a uniform EMI through the life of the loan. Most of the public sector lenders including Bank of Baroda, Bank of India, Union Bank of India, Canara Bank and IDBI Bank had announced linking their loans to the repo rate effective October 1, 2019.
"If the reworked offering of SBI is not linked to repo (which is relatively more volatile than other benchmarks), this would indeed come as a breather for large HFCs, which are already forced to rethink their business models under the new guidelines applicable to banks from October 1, 2019," said ICICI Securities in a note.
Floating rate linked to repo would have made banks more susceptible to asset-liability mismatch. "RLHL products would have exposed banks to interest rate risks which could have been mitigated to a certain extent by linking CASA deposits to an external benchmark. However, HFCs currently do not such mechanism to link their liabilities to external benchmarks.
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However earlier this month, Reserve Bank of India came out with elaborate guidelines on the need for banks to link all their new retail loans and micro small and medium enterprise loans to an external benchmark. SBI's repo linked home loans were open only to people with a certain income level, though its savings deposits continue to remain linked to the repo rate with a floor rate of 3%.
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