Teaser home loans may be scrapped after RBI move

Teaser home loans may be scrapped after RBI move

Mumbai: At least two lenders— Corporation Bank and LIC Housing Finance Ltd—are not keen to continue with their so-called teaser loans and may even consider terminating them before schedule. This follows the Reserve Bank of India’s decision to raise the provisioning on such loans, forcing lenders to set aside more money.

The country’s largest lender, State Bank of India, and mortgage company Housing Development Finance Corp. Ltd (HDFC) said they will review their schemes when they come to end—in December and November, respectively.

Typically, such loans are offered at a discount for the first few years to entice consumers and then the loan rates go up.

“This practice 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," RBI said.

Nearly 20-25% of banks’ outstanding housing loan portfolio of around Rs3.4 trillion is linked to teaser rates as on 30 September, according to rating agency Crisil Ltd.

“While mortgages continue to have the lowest risk profile in the retail risk scale, a high proportion of teaser-rate loans in the banks’ portfolio can increase delinquency risks in the long term," Pawan Agrawal, director, Crisil Ratings, said in a note.

“The (special home loan) scheme is ending in December but we may not continue it till that. Our asset liability committee will meet soon to take a call," said Asit Pal, executive director of Corporation Bank. The bank has a special loan portfolio of around Rs300 crore out of a total loan portfolio of nearly Rs4,700 crore.

SBI, which has a total home loan portfolio of Rs80,000 crore, has nearly Rs20,000 crore under the special home loan scheme. The lender will have to make an extra provision of around Rs320 crore to comply with the new rules, CNBC reported, citing unnamed sources.

SBI offers loans at 8% to customers in the first year and 9% for second and third years, according to its website.

“This change in provision may not have a significant impact on us. We think it is manageable," an SBI official said.

Keki Mistry, vice-chairman and managing director at HDFC, said: “The scheme ends in November and we will take a call after that." HDFC offers loans at 8.5% till March and 9.25% for one year starting April 2011.

Out of the Rs1.06 trillion mortgage portfolio of the firm, nearly 27% is under the special loan scheme that was introduced in December 2009.

An HDFC spokesman said the company does not have to make any extra provisions. “We were supposed to make Rs349 crore. But we have already made a provision (of) Rs727 crore, which is comfortably higher than the RBI rules," he said.

LIC Housing Finance launched a festival offer in September at 8.25% for loans taken till 15 November. It will not continue with the scheme after the offer period.

“We are not keen to continue with the scheme," LIC Housing Finance managing director and chief executive officer R.R. Nair said. The firm has a total loan book of Rs45,000 crore and has garnered around Rs100 crore under the new offer, Nair said.