SBI’s teaser loan plan may not find favour with the RBI

Banking regulator still has concerns over fixed-cum-floating rate loans

Cautious stance: RBI feels borrowers may find it difficult to service loans once normal rates take effect.

State Bank of India’s (SBI) plan to offer fixed-cum-floating home loan rates — known as teaser loans — is likely to hit a regulatory hurdle as the Reserve Bank of India (RBI) is uncomfortable with such products.

Teaser loans are those which charge comparatively lower rates of interest in the first few years after which the rates are increased.

During a recent media interaction, SBI chairman Rajnish Kumar said the bank will engage with the RBI for the product which will bear fixed interest for about 10 years and then, turn floating. There is no fixed rate home loan product in the market though there is demand for such a product, and a fixed-cum-floating rate product could have addressed that demand.

According to sources, the RBI is of the view that some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.

In addition, a bank, while extending the loan, does not take into account the borrowers’ repayment capacity after lending rates increase.

While such teaser products are not banned by the regulator, the standard asset provisioning requirement is higher for such loans. For normal home loans, the standard asset provisioning is 0.4% but for teaser loans it is 2%. RBI had increased the provisioning by five times for such loans since these loans are perceived as more risky.

Higher provisioning discourages banks from offering such products. Following the introduction of higher risk weights, banks had discontinued those products.

SBI’s decision to ponder over such products came after the banking regulator mandated banks to link floating rate retail and MSME loans to an external benchmark. SBI, in fact, pioneered such a product by linking its home loan rate to repo rate, which it started offering from July.

Many other public sector banks followed suit before the RBI mandated such products for the entire banking system from October 1.

SBI, however, decided to withdraw the product earlier this month following the RBI norms on external benchmark-linked floating rate loans and is re-working the product in line with the guidelines.