The Reserve Bank of India (RBI) said on Tuesday loans that are fixed in the initial years and become floating later would be considered as teaser loans and banks must make provisions as mandated by the regulator.
“Interest rates that are a mixture of these two (fixed and floating) are called teaser rates,” said K C Chakrabarty, deputy governor, RBI. “If there are rules, they (teaser loan products) will attract additional provisioning,” he added. He, however, clarified that such products are legitimate and the regulator has not banned such products but only laid down rules to provide for such loans.
RBI had in October 2010, increased the standard provisioning requirement by five times to two per cent for teaser or dual loan products, as compared to other categories. Following this mandate, State Bank of India and Housing Development and Finance Corp had to withdraw their dual-rate home loan schemes.
However, last month, India’s largest private sector bank, ICICI Bank introduced two home loan products, with interest rates fixed for one and two years respectively. The country’s largest mortgage finance company, HDFC followed suit which announced a dual-rate scheme on Monday, offering home loans at a fixed rate for the initial three or five years and at a floating rate thereafter.
While increasing the provisioning on such products, RBI has defined the teaser products as loans, offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates.
Bankers argue that in the recent schemes the fixed rate offered in the initial years are at par with the current market rates. They also said the floating rates on these products are linked to the base rate and any cut in the minimum lending rate will also reduce the floating rates in coming years. Hence, the new products will not require higher provisioning.