The new external benchmark-linked loan pricing was introduced after the RBI realized that transmission of policy rates to customers under the MCLR framework had not been satisfactory.
The new external benchmark-linked loan pricing was introduced after the RBI realized that transmission of policy rates to customers under the MCLR framework had not been satisfactory.

RBI may not allow lenders to offer teaser home loans

  • The discussion around teaser loans started after RBI directed banks to link their floating rate retail loans to an external benchmark earlier this month
  • The central bank has not been in favour of these products ever since SBI first introduced them in 2009-10

MUMBAI : The Reserve Bank of India (RBI) is not likely to allow the return of teaser home loans, following the introduction of the external benchmark-linked loan pricing, a central bank official said, requesting anonymity.

State Bank of India (SBI) chairman Rajnish Kumar had earlier said he will seek a clarification from the central bank on long-term home loans initially with fixed rates, and floating rates later.

“We have had difficulties with those products, as we had said back then when we prescribed higher risk weights. It’s basically pushing risk to a later date," the official added.

The SBI had tried to bring back teaser loans several times in the past. However, the RBI has not been in favour of it, ever since the SBI first introduced such products in 2009-10. The RBI felt banks could use the low interest rates to lure customers into taking these loans and then move to a higher market rate later. In 2011, the central bank had increased the provisioning on these loans to discourage banks from offering them.

Kumar, however, said the need to make the product floating in the latter part arises out of the bank’s inability to project the liability movements of the future.

The discussion around teaser loans started after the RBI directed banks to link their floating rate retail loans to an external benchmark earlier this month. The RBI felt the move came after the central bank felt that linking all new floating rate personal or retail loans or micro and small enterprises smalls could improve transmission of monetary policy.

Banks will have to adopt a uniform external benchmark within a loan category and they are free to decide the spread over the benchmark. The credit risk premium can be changed only when the borrower’s credit assessment sees a substantial change

Last week, credit rating agency Moody’s Investors Service said external benchmarking will be credit-negative for banks as it will limit their flexibility in managing interest rate risk.

According to the credit rating agency, under the new regime, while the floating rate loan book will get re-priced, only the non-CASA (current account savings accounts) deposits will see a repricing on deposits.

The new external benchmark-linked loan pricing was introduced after the central bank realized that transmission of policy rates to customers under the marginal cost of funds-based lending rate (MCLR) framework had not been satisfactory.


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