RBI sees anxious about home loan rates

Jan. 13, 2010 - PRLog -- The perform among commercial banks of attract customers with beneficial interest rates on housing loans only to convert it into floating rates later is a cause for concern, Reserve Bank of India Deputy Governor Usha Thorat said Tuesday.

"In the area of housing loan, teaser rates are increasingly being offered which is a cause for concern," said Thorat at a banking conclave in Mumbai.

"I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal."

RBI’s concern can perhaps be traced to the fact that the genesis of the mortgage crisis in the US lay in home loan extended to borrowers who struggled to repay. These loans, popularly known as sub-prime loans because they were given to people in lower income groups, included so-called adjustable rate mortgages where the repayment is low in the initial months with installments rising in subsequent months, somewhat similar to teaser rates.

Lenders in India, however, say there is no cause for concern as far as quality of lending is concerned since repayment capacity is assessed based on the overall liability and not the first year’s rate. Many leading lenders, including the State Bank of India (SBI), ICICI Bank, Canara Bank, Punjab National Bank and Housing Development Finance Corporation (HDFC), have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.
The shift from lower Home loan interest rates to floating rates has often resulted in the monthly installments of borrowers to shoot up by as much as 50 per cent, along with the risk of the tenure of repayment also getting extended by several years.

Major housing loan providers including State Bank of India, which controls about 25 percent of the total loans and deposits of the country, and top private institutions like ICICI Bank and HDFC have been offering such teaser interest rates.

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