RBI not to allow teaser loans in repo rate regime

Reserve Bank of India (RBI) is unlikely to allow banks to launch teaser loans, which attract homebuyers with lower rates of interest at the start that increase during the remaining tenure of the loan, an official familiar with the development said.

Banks are seeking clarification from RBI on whether they can offer home loans with a fixed lower rate at the beginning and then subsequently 'float' to a higher rate. Such offerings are not possible in a repo-linked loan pricing system, which the RBI has directed the banks to move to from October 1.

When the banks introduce lending rates to external benchmarks like the repo rate or the short-term government bonds, there will be volatility in the loan pricing. The equated monthly installments (EMIs) will keep changing as rates fall or rise. Banks will have to reset every three months.

With the repo rate and the short-term government bonds hovering around 5.40%, borrowers will immediately stand to gain under the new loan pricing system. But in a rising interest rate regime, this will play havoc with the repayment capability of the borrowers.

SBI has launched a repo linked home loans on July 1 and disbursed Rs 2,000 home loans, but recalled the scheme after the RBI issued its new guidelines which did not allow any income restrictions. SBI's repo linked home loans had an income criterion of Rs 6 lakh annually.

A low-interest regime can be problematic if not handled carefully. On the retail deposit front, consumers may find the lower rates of interest offered by banks unattractive. SBI has already linked savings account rate with balances of more than Rs 1 lakh to the repo rate. Depositors could look at alternate investments like small saving schemes of the government or the equity market. Faced with erosion in retail deposits, banks need to walk the balancing line.

India's overall savings rate has declined to 30% from 34.6% over five years ended FY2016-17. The worst dip was seen in the household sector, the largest contributor to savings in the economy, dropping to 16.3% from 23.6% over the period.

"There will be a lot of volatility in rates and banks will have to do a fine balancing act while pricing their loans and deposits. But risk aversion is also a big factor, which influences bank deposits. So in the short term, the deposit rates may not be impacted," said Anil Gupta, Vice President & Sector Head - Financial Sector Ratings, ICRA.

While the RBI wants a transparent anchor rate, banks say that the external benchmarking of all their new retail loans will lead to volatility and throw the repaying abilities of the borrower into disarray, especially when the interest rates are rising. RBI says banks are free to price the loans higher than the anchor rate by building in risk premiums into the lending rates. The existing marginal cost-based lending rate is building in too many costs, leading to an opaque benchmark.

"Banks are free to decide the spread over the external benchmark. However, the premium may undergo change only when borrower's credit assessment undergoes a substantial change, as agreed upon in the loan contract," the RBI said in its guidelines.