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Need regulator to monitor teaser rates: Basu

With some lenders averse to discontinuing controversial teaser rates offered on loans, chief economic advisor Kaushik Basu on Tuesday called for setting up a regulatory authority to monitor such schemes.

india Updated: Nov 16, 2010 15:31 IST

With some lenders averse to discontinuing controversial teaser rates offered on loans, chief economic advisor Kaushik Basu on Tuesday called for setting up a regulatory authority to monitor such schemes.

"Instead of banning teaser rates, we can have independent experts who can prescribe about them like doctors prescribe steroids. My view is that we can have professional body who will have a right to say whether you are making a good judgement or not...," Basu said during a summit at the International Management Institute.

Recalling the role of teaser rates in the US subprime mortgage crisis, Basu said action to regulate the schemes announced by various banks should be decided on a case-by-case basis.

"I am acutely aware of over-regulation... At the same time, there is no getting away from regulation. Having a prescription means there are dangers, but also there are values in the product," he said.

Teaser rates are multi-year loans where lenders give concessional rates to borrowers initially and charge high rates subsequently.

The RBI has voiced concern over the high risk of default on loans offered at teaser rates and had tightened the noose around this product in its November 2 policy review.

At its latest review meeting, the RBI had asked banks to keep more money aside for offering such products to provide a cushion against any default.

According to the apex bank, some banks do not take into account the repayment capacity of the borrowers at normal lending rates at the time of initial appraisal.

"In view of the higher risks with such loans," RBI said that it is proposed "to increase the standard asset provisioning by commercial banks for all such loans to 2%."

Earlier, provisioning against loans offered at teaser rates was 0.4%.

A few months ago, the RBI had asked lenders to do away with teaser rates on loans entirely. However, many of the banks did not comply with the recommendation, arguing that loan offtake would be impacted adversely.

Most recently, State Bank of India Chairman O P Bhatt last week ruled out scrapping teaser rates schemes offered by lenders, as proposed by Housing Development Finance Corp Chairman Deepak Parekh.

"Financial markets will need regulation... financial products will have to be regulated," Basu said.