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RBI governor Raghuram Rajan and SBI chairperson Arundhati Bhattacharya at SBI’s banking and economic conference on Thursday. Photo: Reuters
RBI governor Raghuram Rajan and SBI chairperson Arundhati Bhattacharya at SBI’s banking and economic conference on Thursday. Photo: Reuters

SBI want to back teaser home loans

The bank's chairperson Arundhati Bhattacharya believes such home loans may help boost demand for credit

Mumbai: State Bank of India (SBI) chairperson Arundhati Bhattacharya on Thursday made a pitch for re-introducing so-called teaser home loans to help boost demand for credit, four years after withdrawing such loans amid concern that they could hurt the asset quality of banks.

Bhattacharya slipped the idea in during a conversation with Reserve Bank of India (RBI) governor Raghuram Rajan at SBI’s second annual banking and economic conference in Mumbai.

“I am told that real estate stock is at a two-year high and I was thinking if it is possible something of this (teaser loan) kind could be allowed given the fact that this is one of the portfolios where NPAs (non-performing assets) are the lowest," Bhattacharya said.

Teaser home loans are offered at a fixed low rate of interest in the initial years and are subsequently adjusted to a higher floating rate for the rest of their tenure. SBI and other lenders withdrew the offer in 2011 because of concerns at RBI that such loans were riskier and carried a higher probability of default.

Bhattacharya’s suggestion comes at a time when corporate demand for long-term credit is weak with new investments on hold as companies wait for faster economic growth and an upturn in consumer demand.

This has kept credit growth close to the 10% mark. For the fortnight ended 7 August, non-food credit grew 9.6%. Retail credit growth has been far stronger for most banks. At the system level, retail credit grew by a robust 17.1% and housing loans grew 16.4% between June 2014 and June 2015, according to the latest industry data.

It’s this segment of loans that could get a boost if SBI’s suggestion to allow teaser loan schemes is accepted.

Bhattacharya pointed out how SBI’s idea of offering a low initial interest rate helped keep demand strong in 2008 when the economy was showing signs of a slowdown. That was the year that credit markets froze after the collapse of Lehman Brothers Holdings Inc.

“In 2008 when the economy started faltering, one of the things that made demand go up was the 8% housing loan (scheme) that SBI launched. Of course, at that time it was tagged as a teaser. We at SBI refute that because the due diligence that went in for those loans was the same as other loans. Even eligibility was the same as (for) regular loans. (The) only thing is that for the first two years the customer is allowed to pay at a lower rate. What did happen was that demand really kicked in," she said.

In response, Rajan was quick to quip: “I never say no to your ideas. We will have to look into it."

According to a 29 July report by Knight Frank India, home sales and project launches in the Mumbai Metropolitan Region fell to their lowest since the economic crisis of 2008 in the January-June period.

The National Capital Region, the country’s largest property market, saw a pile-up of inventory in the January-March period that will take close to 78 months to clear at the current pace of sales, according to property consulting firm Liases Foras Real Estate Rating and Research Pvt. Ltd, Mint reported on 31 July.

The RBI governor put the onus for pushing home sales on developers, saying that if prices were to come down, they would be able to sell their unsold stock and increase demand for new homes.

“We don’t want to create a situation where prices stay high at a level which means demand cannot pick up," said Rajan, adding that it would help if developers brought prices down to stoke demand, instead of sitting on unsold inventory.

In an interaction following the monetary policy announcement earlier this month, Rajan had said that while banks do not have a significant direct exposure to the real estate sector, a slowdown in the property sector can have an impact on a number of other industries like cement and steel, which rely on demand from home builders.

The issue of teaser loans has been a sensitive one for the banking sector.

SBI’s teaser loan scheme was a hit around 2009-10 and forced its competitors, including ICICI Bank Ltd and Housing Development Finance Corp. Ltd to introduce similar products even though veteran bankers like Deepak Parekh had initially criticized such schemes.

RBI asked banks to make higher provisions on account of loans disbursed through such schemes.

In an interview with Mint in March 2011, then RBI deputy governor K.C.Chakrabarty called the product “riskier" for both customers as well as banks. RBI also pointed out that these loans were available to only new customers and existing customers did not get the benefit of lower rates, making such products discriminatory.

“Teaser loans have been discouraged by RBI keeping in view the global experience with such schemes, especially sub-prime loans in the US. It is not correct to say that there were no NPAs from these schemes because RBI took steps to ensure that the exposure to the scheme did not rise to levels where it could have had a major impact," said Vaibhav Agrawal, vice-president-research at Angel Broking Ltd.

“Logically speaking, you cannot give a customer a loan at a lower rate and expect him to pay a much higher rate in the next few years. That is RBI’s view and I doubt it will change it," he added.

Separately, during the chat with Bhattacharya, Rajan also alluded to the rise in NPAs and said some part of the rise in bad loans was because of banks’ failure to evaluate projects properly.

“Banks have to recognize distress and deal with it. It is an accounting issue but it is also a project evaluation issue beyond that. What we are saying is an NPA does not mean that banks don’t lend to it," Rajan said.

Bhattacharya said it is difficult for banks to lend to a project which has already been declared an NPA. “The moment you declare it an NPA, giving further loans becomes close to impossible because NPAs will bloat. Also, we have to answer questions on why we are giving more loans if it is already an NPA. There is no incentive to lend more," she added.

PTI contributed to this story.

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