Om Prakash Bhatt bristles over RBI home-loan teaser

The latest ‘teaser’ from the Reserve Bank of India hasn’t amused Om Prakash Bhatt, chairman of State Bank of India, the bank that pioneered limited-period soft terms for home loans.

“I don’t know what the RBI means by teaser loans,” Bhatt retorted minutes after deputy governor Usha Thorat expressed concerns over ultra-low rates offered by banks to attract home loan takers.
It is not right to refer to the 8% home loan scheme as ‘teaser’, Bhatt said.

Ironically, it is for the third time in the recent past that SBI is finding itself on the opposite side of the table with the RBI, technically its former owner.

Bhatt also defended his scheme and said “there are no hidden costs in these loans or any add-backs.”

SBI, the country’s largest lender, apparently is not happy with the stance the central bank has taken on the provision coverage ratio and expansion of the held-to-maturity category for accounting banks’ investments.

Bhatt justifies the bank’s provision coverage ratio of about 40% as being safe enough, even as the RBI wants all banks to have a minimum provision cover of 70% to make banks financially more sound. Sources say SBI wanted the held-to-maturity category to be expanded, but RBI shot down those requests.

In July-September, government bond yields had shot up due to the incessant supply through auctions, thereby resulting in mark-to-market losses in banks’ portfolios.

To avoid such losses and support the borrowing programme, some banks had suggested an increase in the limit on the held-to-maturity category. SBI was one of the first to place such a request.

“In the area of housing loans, teaser rates are increasingly being offered which is a cause for concern. 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,” Thorat said.

She also said such prudence was also important for consumer protection, to prevent them from being surprised by a sudden rise in easy monthly installments (EMIs) after low-fixed rate for the initial year or two.

SBI offers an 8% interest rate on home loans up to Rs 50 lakh for the first year, after which rates rise gradually.

After the initial reluctance, similar rates and schemes have been offered by its peers like HDFC, ICICI and Corporation Bank, among others.

Bhatt said the low home loan rates had helped push up credit offtake at a time when the industry was suffering from extremely low loan disbursal amid excess liquidity in the system.

S Sridhar, chairman and managing director of Central Bank of India also defended low-cost home loan schemes saying banks were ensuring repayment capacity of borrowers, unlike in the US, where asset was the basis of loan disbursal.

“In the US, such teaser loans were being offered based on value of asset and not the finance-ability of the person. We, in India, look at whether a person has the capacity to pay back the loan amount or else do not offer the loan at all,” he said.

When SBI’s scheme was announced, Deepak Parekh the then chairman of Housing Development Finance Corporation referred to it as a ‘gimmick’ that could lead to problems if interest rates in India shot up sharply in the future. But, eventually HDFC also succumbed to market pressure and came up with a limited-term special home loan scheme at 8.25% fixed up to March 2012.
Ironically, in a recent incident, an HDFC official admonished a journalist for referring to such low-rate home loan schemes as a
‘gimmick’.

The central bank may have just set the cat among the pigeons with its comments on ‘teaser’ loans and the country’s largest lender, SBI will just have to grin and bear it. NW18