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The Reserve Bank of India thinks it is bad for the borrower, while the Government sees a lot of advantage in it. The product is the much debated “teaser” home loan.
This clearly comes to the fore in the Economic Survey 2010-11. Despite the RBI expressing its concern about State Bank of India's teaser home loans scheme, the Government appears to be convinced about the inclusiveness of the scheme.
Buttressing the stand of the country's biggest lender on teaser home loans, the Survey said the fact that the scheme enabled many new home buyers to enter the market speaks well of the inclusiveness of the scheme even as the sub-prime segment was deliberately left out.
Pointing out that the ‘teaser loans' terminology is sufficiently tainted for a neutral term to be of some value, the Survey refers to such loans as ‘terraced loans' i.e. loans in which the monthly repayment of instalment rises over time.
“The response of the market to this (terraced loan) was very good….Defaults on these (loans) have been negligible and cases of foreclosure rare. Also, these loans played a major role in promoting inclusiveness. Around 90 per cent of the home loan borrowers were first time home buyers,” said the Survey.
The Survey specifically referred to the fact that SBI came out with two different terraced loan products — Happy Home Loan in February 2009 and Easy and Advantage Home Loan in August 2009. Both these loans hold the interest rates fixed and below the market rate in the initial years. Thereafter, the rates turn floating.
The RBI, in its monetary policy review, had warned that teaser loans raise concern as 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.
Further, the RBI had observed that many banks at the time of loan appraisal did not take into account the repaying capacity of the borrower at normal lending rates.
The survey emphasised that banks should be given the freedom to introduce new products so that consumers have wider options.
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