The outgoing chairman of State Bank of India, O P Bhatt, seems to be defending the indefensible and, in the process, making things worse by committing a second transgression. The first was initiating teaser rates and the second, not only standing by the action but in a manner that appears to be disrespectful of the banking regulator. Teaser rates cannot have more dubious antecedents. They were among the practices that brought upon the US the entire sub-prime crisis — a bubble built on sanctioning mortgages to those who did not have the means to service them. It is this that eventually snowballed into the financial crisis of 2008, from the adverse consequences of which the global economy is only now recovering. At a time when the property bubble was building up, mortgage initiators in the US induced people to take on obligations that they had no means of sustaining by offering starting interest rates and, therefore, payments that were artificially low. As was inevitable, when these rates were “reset” after a time, the borrowers were simply unable to keep up with their repayments and walked out. The last was made possible by the mortgages being “without recourse” for the borrowers. The social and economic blight that this caused is still starkly visible in US suburbia through shuttered foreclosed houses and depressed neighbourhoods, which had earlier been thriving communities.
It took some panache for SBI to adopt the practice of offering teaser rates after what had happened in the US but both the Reserve Bank of India and the Union finance ministry may have been somewhat indulgent initially for a good reason. Here was a public sector organisation seeking to leverage its size and going in for greater market share, thus rejecting the stereotype that the public sector is never able to pugnaciously fight it out in the marketplace. Mr Bhatt – the initiative was entirely his – has said in self-defence that SBI has taken pains to ensure that due diligence was exercised so that teaser rates did not rope in borrowers who were intrinsically unable to service the loans in the long term. He has been looking at the quarterly numbers for any signs of ill health and extending the practice only when none was visible. That may well be so but a housing loan is a long-term affair and these are early days. How long a large organisation like SBI can monitor from day to day a retail asset class that was vitiated in the first place with a wrong inducement is anybody’s guess. Besides, SBI’s assets are not in the best of health and it is in fact behind the norm stipulated by the RBI in making adequate provisions for non-performing assets. Mr Bhatt’s response to this has been to say that the provisioning norms mandated by the RBI are not “appropriate” and the RBI has changed them “suddenly”. This is of a piece with his latest remarks on teaser rates. Regulators and the regulated engage in regular public discourse over their differences of perception. This is not just acceptable but healthy. But an appropriate tone and tenor must be maintained. To publicly thumb your nose at the policeman is good for neither the organisation in question nor the system.