Survey ignores RBI’s discomfort, says such products play a huge role in financial inclusion.
State Bank of India Chairman O P Bhatt got a huge pat on the back from the Economic Survey, which has strongly backed its controversial teaser loan scheme. This comes even as the Reserve Bank of India has gone public with its discomfort with such schemes.
Teaser loan schemes are those which charges lower interest rate in initial years. The Survey questioned the nomenclature itself, that is, teaser – a term used by RBI to identify such loans, and said such loans should be called as ‘terraced loans’.
“The terminology is sufficiently tainted for a neutral term to be of some value. We shall here refer to loans in which the monthly repayment instalment rises over time as a terraced loan” the Economic Survey said.
SBI, the country’s largest lender, is offering such products since February 2009. Despite RBI’s concerns, SBI is the only one which has decided to continue with the product though all other lenders withdrew such loans. In November last year, the banking regulator increased the standard provisioning requirement for such products by five times to two per cent to discourage such schemes. Despite this multi-fold increase in provisioning, SBI continued with the product albeit with some tweaking.
The Economic Survey went on to say that SBI has not given loans to subprime borrower, unlike in the US. “There was a lot of effort made to keep the contracts transparent so that the borrowers knew exactly what they were getting into,” the Survey said in the context of SBI’s home loan product.
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The Survey said the decision of SBI not to make these products available to the subprime borrowers and instead expand the choice available to borrowers with an assured capacity to repay played a major role in financial inclusion.
“The fact that this enabled many new home buyers to enter this market speaks well of the inclusiveness of the scheme, even though the subprime segment was deliberately left out. This is what enabled India’s mortgage market to remain stable even as such markets in industrialized countries faltered,” it said. Bhatt had recently said almost 80 per cent of the home loans given by the bank are below Rs 10 lakh, which means the common man.
In the end, the Survey however says that the important restriction should be that banks and even NBFCs should be discouraged from lending to categories of borrowers who are clearly not in a position to take on such debt burdens. “As far as restrictions on the types of products go, these should be used minimally and with judiciousness,” it added.
