Tease, so belts are tightened

The Reserve Bank of India (RBI) and the Chief Executive of India of the country's largest bank, State Bank of India, do not see eye to eye on the wisdom of teaser loans. While the former wants to put an end to the practice of baiting wannabe home owners with loans that charge a relatively low fixed interest for say three years with a transparently built-in provision for switchover to the floating regime thereafter, the SBI chief sees nothing wrong in the practice especially if suitable safeguards are taken and so long as the entire process is transparent.

The RBI has its heart at the right place when it apprehends an encore of what happened in the US a couple of years ago — the sub-prime crisis subsuming the financial sector. The origin of the crisis there was rooted in teaser loan to sub-prime borrowers aka NINJA — no income, no job and no assets - category by mortgage finance companies which were rather blase about the threat of loans transforming into NPAs on the smug assumption that they after all could realise their dues if it came to the crunch by disposing of the houses for which the loans were given.

Indeed, mortgage loans were invariably without recourse, meaning the borrower, or for that matter nobody else, was personally liable. The lender could recover his dues if it came to the crunch by simply disposing of the mortgaged asset. But when the real estate prices came crashing down at the first hint of default, they were in a soup and dragged everybody else involved in the game along in the downhill course. For, the mortgage companies resorted to securitisation of the receivables by selling them to special purpose vehicles (SPVs) which issued bonds on attractive terms on the security of mortgage loans, the proceeds of which were used to pay off the mortgage companies. The ultimate hit therefore was taken by investors in these bonds or the insurers who blithely insured these bonds against default on the basis of their implicit belief in credit rating agencies that had given top ratings to these bonds without proper assessment of the credit risks involved.

SBI chief's rationale

What perhaps makes the SBI confident of not repeating the US mistake is that in India we make a thorough assessment of loan applications with repaying capacity figuring ahead of the value of the house. This is as it should be. The lender should always set store by the repaying capacity rather than hope for realising his dues through adversarial proceedings against the borrower. If the US banks wooed the NINJA category, we in India woo the DINKY — double income with no kids yet - category. Even if both the husband and wife are not earning, giving loans after carefully satisfying oneself of the repayment capacity is not such a bad thing even if in the process teasing is resorted to.

Teasing for a noble purpose need not be frowned upon. Leveraging encourages financial discipline and hard work by the entire family. In China, the most important qualification the groom-to-be must possess, above anything else, is ownership of a house. We, in India, should emulate the Chinese because for the bride's parents nothing can be more gratifying than their would-be-son-in-law owning a house that adds immensely to one's sense of security and well-being.

Housing after all produces a virtuous cycle —businesses boom especially those manufacturing steel, cement and what have you, banking sector thrives and families tighten their belts, pull up their socks to face squarely the EMI. Loan repayment for a noble cause is conducive to financial discipline. In its wake, generally, vices such as alcoholism and gambling take a back seat. The borrowers, indeed their entire family, work hard to make both the ends meet. Their children who are in their formative ages are taught the virtues of thrift and parsimony and the dangers of being a spendthrift.

No need for paranoia

The RBI may therefore shed its mortal fear of teaser loans especially if the borrowers are suitably alerted and appraised carefully. Shops and department stores bait wannabe customers with teaser offers on limited items with the idea being to hook her and make her purchases a large number of other items on which there are no discounts. Mortgage finance companies should be allowed to bait with laudable objectives, transparently. And if this is done, there is no need to be paranoid. House for all has a nice ring to it besides being an excellent family and governmental investment. Teaser loans could have the effect of reaching out to those at the bottom of the heap. And if the home loan culture takes deep roots tantalizing people from the poorer strata, it would be so much better because in its wake urban shanties, an eyesore on our cities would go away. Another positive spinoff would be cleanliness, with slum dwellers not defecating in wide open streets in full public view.

NREGA has to some extent addressed the problem of hunger if not poverty as Mr P. Chidambaram so eloquently puts it. It is time the idea of house for all is taken forward without encouraging the notion that the state would build houses for the poor, but would encourage them with affordable loans. For human beings the idea of surviving on doles is demeaning whereas the idea of acquiring a house even with a loan is edifying and uplifting. Insurance companies encourage people to start early for taking health and life insurance because the premium is low. Housing finance companies too should encourage youngsters to start early so that the loan is paid off before other pressing obligations like children's education present themselves. Often one is confounded when he has to simultaneously taken on all the problems together.

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