Better safe than sorry

Better safe than sorry
The Economic Times, July 2, 2009, Page 12

Beware Of Teaser Loans

IS THE State Bank of India (SBI) out to displace Citi or ICICI Bank in aggressive banking? Its latest offer of home loans at a fixed rate of interest for the first three years, after which customers can choose between a floating and fixed rate, follows on the heels of similar teaser loan offers earlier. Given that teaser loans (adjustable-rate loans in which borrowers pay a relatively low interest rate initially, after which the rate is re-set) have been hugely discredited in the subprime crisis, SBI’s new-found fascination with such loans is hard to comprehend. As is the RBI’s silence on the issue. Teaser loans are meant to entice borrowers into taking loans because they look like a dream; never mind they might turn into a nightmare some years hence. In the instant case, the interest rate is fixed low up-front only for the first three years. From the fourth year onwards, the rate depends on SBI’s advance rate; borrowers opting for a floating rate paying 2% more and those opting for a fixed rate paying 1% less. There is also a five-year re-set clause which means every five years rates could change. Since housing loans, typically, have long maturities there is a high probability that the interest rate at the fag end of the loan period could be very different from that at the beginning. EMIs (equated monthly instalments) could be higher or lower depending on how the interest rate moves; higher EMIs could result in repayment problems. SBI, on its part, will have to be very careful in selecting home-loan borrowers if it is not to end up with a bad housing loan book. In a country where retail borrowers are yet to fully comprehend the implications of floating rates of interest, teaser loans could be dicey.

Public sector banks (PSBs), it is true, have often chafed at being compared unfavourably with their nimbler private sector counterparts. And yes, there is much they can learn from the latter, especially when it comes to customer-service. But today if PSBs are sitting pretty vis-a-vis their private sector rivals, it is because they remained firmly grounded and, by and large, did not get carried away by ‘irrational exuberance’ and risky products. SBI would do well to remember that.