Teaser Home Loans – road ahead?
Teaser loans have interest rate that is 1-2% lower than the prevailing interest rates in the market and that low interest rate is offered for specific time period, say 1 to 2 years. After the honeymoon period (initial years where they have to pay low rate of interest) the borrower needs to move to floating interest rate existing at the specified time.
In India, teaser home loans were introduced in January 2009. The initiative which was first introduced by State bank of India (SBI) was soon followed by other banks. In the present scenario where interest rates are supposed to increase in near future, home loan borrowers found the concept of teaser loans very attractive as they would have to pay low interest in the initial phase, but they seemed to ignore the fact that after completion of the honeymoon period, when the borrowers will start repayment at the floating rate, the shift in the EMI will be huge, resulting in disruption in their financial planning. The same results in increased default payments affecting the asset quality and profitability of the banks.
During last few months, RBI has expressed discomfort with banks who are lending home loans at teaser rates. In its second quarter review of monetary policy the limit for asset provision in the case of teaser home loans was raised from 0.4% to 2%. This will restrict the ability of banks to offer loans at lower interest rates in initial years. RBI was also concerned that borrowers were not intimated properly about how floating rates are estimated and what will be the implication of teaser rate after the initial low interest period. RBI also pointed out that the banks have been ignoring the repayment capacity of the borrowers while offering home loan rates. RBI also expressed concern about the fact that normal home loan borrowers are not savvy to estimate the impact of increased home loan rates after few years, and might default once the rates start rising.
From the total home loan portfolio of State bank of India i.e Rs. 80,000 crore, teaser loan account for Rs. 20,000 crore and approx 3% is estimated as the default rate of the teaser rate. For HDFC, teaser loan portfolio accounts for 27% of its retail home loans i.e. 17,500 crore. Union Bank of India disbursed approx. 3000 cr. rupees under the Teaser home loan scheme. Between March 2009 and December 2009, the home loan portfolio of banks and other housing finance companies grew by approx 9%. SBI who was the first one to start the scheme grew its home loan portfolio by approx 25%.
Housing development and finance corporation (HDFC) has extended the scheme four times from December 2009. HDFC Chairman Mr. Deepak Parekh said that lenders of teaser loans should withdraw the scheme as RBI is quite unhappy with the product because customers are not able to realise the implication of teaser loans after the honeymoon period. HDFC has extended its teaser home loan scheme in October where borrower will pay 8.5 in first year (April 2011) and 9.5 in second year (April 2012). These rates were revised from previous rates of 8.25% and 9% for first year and second year respectively. The move was taken with the fear of losing their market share to the rival banks. Now, HDFC is not in favour of extending this scheme taking into consideration the additional asset provisioning mandated by RBI.
On the other hand State Bank of India says that the bank is still positive about their special loan scheme (Teaser home loans) despite RBI's additional provisioning on the scheme. SBI Chairman Mr. O P Bhatt said that teaser loans are useful to create demand when country is going through tough phase. As per Mr. Bhatt, the rate of interest charged from the borrower in first year is lower than their paying capacity and increase in the subsequent years is justified as the borrower's capability to service the loan is likely to increase. Currently SBI is charging interest rate at 8% for first year and 9% for second year.
The demand for residential loans has been rising since last few months and is expected to grow because of the upcoming affordable housing projects by many of the real estate developers. According to one of the rating agencies in India, it is estimated that from the total bank's home loan portfolio of approx 3.4 trillion in September 2010, 20-25% was linked to teaser loans rates.
As per experts, the provision mandated by RBI for teaser loans will affect the profitability of the bank in long run and banks will not be able to continue with the scheme. The future of the teaser loans will highly depend on the move by the SBI. If SBI withdraws this scheme, other banks may also follow suit.
Teaser home loans have led to an increase in the demand for residential property among other things due to incentive of paying lower interest rate for initial years supported with low cost housing offered by many developers. In December 2008, SBI was able to improve its market share of home loans by approx 18% with the help of teaser loan scheme. However, the decision of RBI to hike key policy rate, and increase standard asset provisioning have made it difficult for the banks to continue the offer of teaser home loan schemes. This is likely to impact the demand for housing and put downward pressure on the real estate stocks. The latest loan-for-bribe scandal will also impact the real estate sector, as the banks are likely to toughen the terms of loans for real estate companies squeezing the liquidity in the market
Questions and Answers
Unlike ICICI and HDFC, other banks and housing finance firms may not come out with schemes offering dual interest rate housing loans on the back of higher provisioning norms stipulated by the RBI for such advances.
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