SBI’s teaser home loans may continue after Dec 31

The Reserve Bank of India may be frowning on the practice, but the State Bank of India (SBI) is sure it makes good business sense.

India’s largest lender, therefore, is planning to extend its special home loan scheme, or the so-called ‘teaser’ loans that carry lower interest rates in the first couple of years, beyond December 31.

But this time the loan will come at a higher interest as the bank is planning an upward revision of their base rate from January.

“We are planning to extend our special home loans scheme beyond December 31 with few changes in the interest rates as we have to cover up our additional costs. The final decision on the same will be taken at a meeting on Thursday,” said an SBI official who did not wish to be named.

SBI is also planning to hike its base rate from January 2011 and the decision on the same will also be taken in the meeting, the official said. The current base rate of SBI is 7.6%, which is one of the lowest in the banking industry.

The special home loan scheme is a limited period scheme under which home loans are disbursed at concessional rates for the initial years.

Under this scheme, SBI is offering these loans at 8% for the first year, 9% for the second and third years, and at the floating rate thereafter.

Earlier this month, ICICI Bank and Housing Development Finance Corporation (HDFC), SBI’s two main competitors in this business, had withdrawn these schemes. But they may come back in the market again. “Special home loan scheme is quite attractive for consumers. If SBI continues with the same structure, then its market share in the home loan market will surely go up. At the same time this would also force the other players to come back into the scene to compete,” said Harsh Roongta, chief executive officer, Apnapaisa.com.

Analysts opine in order to protect margins, SBI may offer the loans with a fixed rate of repayment only in the first year and then use the floating rates. “To reduce the effect on the margins they may change the structure of the loan. For instance, if SBI increases the base rate then they might offer the rate for only one year and then use the floating rate from the second year.” said Chaitra Bhat, banking analyst, LKP Securities.

Last week Reserve Bank of India (RBI) raised concerns on teaser rates as the regulator felt that some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. The RBI observed that many banks at the time of initial loan appraisal, did not take into account the repaying capacity of the borrower at normal lending rates. Therefore, in view of the higher risk associated with such loans, the standard asset provisioning on the outstanding amount was increased to 2% from 0.40% earlier.

The provisioning on these assets would revert to 0.40% after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’, said the RBI notification.

The SBI official said that the bank is also going to assure RBI on this before extending the special home loans scheme beyond December 31. “We do take into account the repaying capacity of the borrower and at the same time we also make necessary provisions for these loans. We are going to assure RBI about this,” the official said.