RBI not amused about teaser rates

RBI not amused about teaser rates
The Economic Times, January 13, 2010, Page 1

Our Bureau MUMBAI

INDIA’S banking regulator, the Reserve Bank of India (RBI), has expressed concern about banks offering home loans with teaser rates— schemes where monthly installments rise after the initial years.

The central bank’s worries stem mainly from the fear that borrowers may find it tough to repay loans once interest rates go up after the first couple of years when the rates are fixed. “Teaser rates are being offered increasingly, which is a cause for concern,” said Usha Thorat, deputy governor, RBI, at a banking conference here. “I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account the repaying capacity of borrowers when the rates become normal.”

RBI’s concern can perhaps be traced to the fact that the genesis of the mortgage crisis in the US lay in home loans extended to borrowers who struggled to repay. These loans, popularly known as subprime loans because they were given to people in lower income groups, included so-called adjustable rate mortgages where the repayment was low in the initial months with installments rising in subsequent months, somewhat similar to teaser rates.

Lenders in India, however, say there is no cause for concern as far as the quality of lending is concerned since repayment capacity is assessed based on the overall liability and not the first year’s rate.

Many leading lenders, including State Bank of India (SBI), ICICI Bank, Canara Bank, Punjab National Bank and HDFC, have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.