Taking Away Temptation

Which seems easier—paying Rs 20,000 a month or Rs 24,000? Okay, no prizes for guessing the obvious. The former will be much simpler to take out of your budget. Of course, you may have to pay the latter in a few years, but why borrow worry? This was the lure that banks were using to attract potential home loan takers—teaser rates.

In 2009, the State Bank of India launched a scheme that promised a home loan at an interest rate of only 8% for the first year and 9% for the next two years. From the fourth year onwards, it would be 1.75% over the base rate. The overwhelming response from the public prompted other banks and housing finance companies to come up with similar schemes, resulting in a deluge of such loans. However, big brother RBI, after keeping a watchful eye on such schemes over the past year, was not convinced about the reliability of such loans. In its mid-term review of the monetary policy in November 2010, the central bank increased the standard asset provisioning by banks for all teaser loans to 2% from the earlier 0.4%. This was aimed at forcing them to set aside more capital as cover for such lending.

While announcing the tough measure, the RBI said that the move was prompted by the higher risk associated with such loans.“This practice (teaser rates) raises concern as 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. It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates,” RBI had said.

The central bank’s move has led most banks to withdraw from the field. HDFC and ICICI Bank have already backed out. Others, including SBI and Punjab National Bank, might allow their special schemes to lapse when the current tenure of the schemes comes to an end on 31 December.

So, what does the withdrawal of the teaser rates, mean for you? In case you had plans to finalise a home loan deal in 2011, and are feeling left out at having missed the bus, relax. Maybe, you have staved off facing a major headache as the home loan would have grown older.

Experts believe that teaser rate schemes hide a bombshell that could ruin your finances once they go floating. Aditya Verma, COO, , points out that similar lending practices had triggered off the global financial crisis. “Teaser loans tempted people to invest in property even if they were not financially sound enough to service the full loan. These and other practices were the root cause of the downturn in the US and some European countries.” Kavi Arora, CEO, Religare Finvest Limited, also argues against teaser loans. “The regulation is a good move for investors. This will help a borrower to plan his investment better with clarity on long-term commitments,” he says.

However, there are dissenters. Pranab Datta, vice-chairman and MD, Knight Frank India, believes the move will hurt the housing sector. “Borrowers who are at the initial stages of their careers rely on such schemes as the EMI burden in the first few years is comparatively smaller than regular loans. As the income level of the borrower rises, he can bear the higher EMI outgo,” he says.