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Case for teaser rate return

Mumbai, Jan. 22: A panel appointed by the Reserve Bank of India (RBI) to assess the feasibility of more long-term fixed rate loans products today suggested that banks should consider relaunching teaser or dual-rate loans.

The panel, headed by K.K. Vohra, chief general manager, internal debt management department of the RBI, however, recommended that a large portion of such loans should carry a fixed rate of interest. Earlier, a small portion of the dual-rate loan was fixed.

“The committee discussed the loan product which was in vogue in one bank wherein a part of the loan had a fixed rate and another part had a floating rate. The committee recommended banks consider relaunching similar products with a major proportion of the product as fixed (2/3rd fixed and 1/3rd floating),” the panel said in the report.

Teaser, or dual-rate home loans, were popular among banks and retail borrowers between 2009 and 2011. The State Bank of India (SBI), which had first introduced the scheme in February 2009, offered a fixed interest rate for the first few years and a rate linked to the lender’s benchmark rate thereafter.

The scheme earned the displeasure of the RBI, which raised the provisioning requirement on these loans as it feared that borrowers might find it difficult to repay the loans at the floating rate which was higher than the fixed rate. Finally, banks withdrew these schemes.

The suggestion to reintroduce such dual rate loans comes at a time the retail loan portfolios of banks are heavily skewed in favour of floating rate products. According to the panel’s findings, 75 per cent of the retail lending portfolio of the 21 banks surveyed comprised floating rate loans.

The panel recommended banks introduce longer-tenor fixed rate loans of up to 30 years, which would reduce the equated monthly instalments (EMIs) of the borrowers.

The panel, however, said this facility could be made optional for customers and it should be clearly documented in the most important terms and conditions. This is necessary as the absolute burden of interest increases for the borrowers in case of such loans.

The committee was in favour of retaining the pre-payment penalty on fixed rate loan products, but it said that this should only be on the outstanding amount and not on the sum initially sanctioned.

It also raised concern on the huge interest rate differential between fixed and floating rate homes loans, which extended up to 5.5 per cent in some cases.

 
 
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