RBI snoops in on teaser loans | india | Hindustan Times
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RBI snoops in on teaser loans

The Reserve Bank of India (RBI) is worried that cheaper home loan rates for the startup years of a mortgage – called teasers – are endangering prudent banking. But banks say they stand on strong principles that involve clear check of borrowers’ creditworthiness.

india Updated: Feb 10, 2010 22:55 IST
HT Correspondent

The Reserve Bank of India (RBI) is worried that cheaper home loan rates for the startup years of a mortgage – called teasers – are endangering prudent banking. But banks say they stand on strong principles that involve clear check of borrowers’ creditworthiness.

M.V. Nair, chairman of the Union Bank of India and also the chairman of the Indian Banks Association (IBA) told Hindustan Times on Wednesday that the association had received a letter from the RBI last month seeking details on teaser loan campaigns.

“We will discuss the matter in our next managing committee later this month after which we will have a meeting with the RBI to discuss the operational details,” he said, without giving further details on the letter.

Last month, RBI deputy governor Usha Thorat had expressed concern that borrowers might not be aware of the implications of a subsequent rate rise in teaser loans.

Several banks, including the State Bank of India, ICICI and HDFC have launched new products with rates ranging between 8 and 8.5 per cent for the first three years of the tenure, after which market rates kick in.

While these boost business, regulators are keeping a keen eye because the sub-prime credit crisis in the U.S that led to the world economy’s worst meltdown in 80 years had its roots in home loans that were offered to customers without adequate repayment capacity.

O.P Bhatt, chairman, State Bank of India, did not respond to HT’s calls, while ICICI said it would offer no comment.

“RBI's concern is rational. Teaser rates or offering rates 0.5 percentage points lower or so for short durations is understandable but otherwise they are irrational and create two classes of customers,” said R.R. Nair, CEO, LIC Housing Finance. “There should not be a wide gap.”