It is said that economic imbalances are a major source of crisis. Moreover, certain imbalances are so hyped with over-exuberance, that only bearish recessionary situations can dampen the spirits and correct the frothy build-up that developed into the system.
However, once the recession has deepened its clutches, it is difficult to come out from the drubbing received and revive the shrinking growth in demand for goods and services. At such times, the need of the hour is to pump-prime the economy and initiating various measures required to boost the consumer sentiment and spending.
In India, ‘Teaser rates’ were introduced by the banks last year to boost demand for housing finance in a slowing economy – in a bid to entice borrowers for home loans at discounted rates for the initial few years of the tenure.
This special loan scheme – which was first launched in January 2009 by public sector SBI with its Easy Home Loan and then followed by other finance companies – has been dubbed by many as a marketing gimmick.
Such schemes offer a fixed rate of interest in the initial years and then move to the floating rate mechanism. SBI was the first to start offering home loans at 8% for the first year, 9% for the next two years and linked to market rates in the subsequent years.
In the past, the central bank has expressed its discomfort against such teaser rates and tried persuading banks and finance companies to stay away from such mortgage products.
Teaser rates could create problems in future, particularly if rates shoot up – as these are floating rate loans and fixed only for first 2-3 years. In fact, the RBI governor Duvvuri Subbarao has raised interest rates for the 6th time this year, pointing towards a rising rate cycle.
Further, RBI has now made it tougher for banks to extend teaser loans on the fear that borrowers might default when rates surge which could prove risky for the banks. The banking regulator has hiked the limit of asset provisioning for teaser home loans from 0.4% to 2% in a bid to discourage banks from lending at lower rates in initial years.
Moreover, a number of finance companies also indulge in unfair practices by not providing proper illustrations to the gullible borrowers on how floating rates are pegged and what are the precise implications of the teaser rates after the discounted period of fixed interest regime.
The apex bank has also said that some banks do not take into account the repaying capacity of the borrowers at normal lending rates at the time of initial loan appraisal. In another stern move against the real-estate industry, the RBI has increased the risk weight for housing loans above Rs.75 lakh which would render such high-value loans as expensive.
Is RBI right in striking the hammer on the Teaser Rate loans?
i ) I beg to slightly differ on teaser rate explanation. In my opinion, the MNC bank used to provide ‘teaser rate’ when you start the loan even in at floating rate. For example nationalized banks might have floating rate at 9.25% for new or existing customer. However, the MNC bank would might make an advertisement that they would offer housing loan at 8.00 %, however this might be only for new customer at the start. Once customer has taken loan they would start increaing the interest rate and maybe after few years one would find interest rate beyond nationalized bank.
ii) RBI has also provided directive that the bank should not fund more than 80% of the property values (early those used to fund 90%). I feel this should only be upto 70% or 3:1 ratio (3 relates to Debt and 1 as equity), which is normally the norm for small scale sector financing.
Earlier had written in my blog about this topic, for those of you interested.,
http://indian-amps.blogspot.com/2010/04/funding-your-property-investment.html