Indian banks are picking up a discredited idea from global peers: teaser rates. Are they playing with fire?
Many of our banks have been busy offering borrowers mortgages that start with very low interest rates and then become more expensive. This was a strategy used by many US banks in the bubble years, making it attractive for people to buy homes just before real estate prices crashed in that country. Many of these home loans will be reset in 2010. In other words, millions of US borrowers will suddenly have to keep aside a bigger share of their monthly incomes for interest payments, a move that increases the risk of more defaults and a further shock to bank balance sheets.
Innovations such as teaser rates are inevitably invitations to trouble. South Korea had a mess with bullet mortgages: Borrowers paid interest at first and the principal was only repaid on maturity.
Indian families are better placed to handle a payments shock. They have less debt and salaries here are growing so that higher interest rates later are less of a problem. Yet, this is a dangerous game.