Prudent decision

With the State Bank of India bowing to persistent pressure from the Reserve Bank of India to stop “teaser” home loan rates, a major policy difference between the country's largest bank and the regulator has, for the moment at least, been resolved. The new Chairman of SBI, Mr Pratip Chaudhari, has defended his decision to acquiesce to the RBI, offering the view that his decision both addressed the regulator's concerns and would not in any way “subtract value” for the customer. Under the new dispensation, a floating rate home loan product kicks in from May 1, in which customers will get a spread above 8.5 per cent. Not before long, new borrowers would have forgotten the idea of teaser rates at or around the base rate, though the scheme will continue for existing customers. But what will remain is the aftertaste of a policy instrument that has been a bone of contention between the RBI and the country's largest bank, with a basic difference in perception of risks, both for customers who may default when teaser loans move into higher floating rates and for banks that may end up with defaults by customers unable to repay high-cost debt.

The SBI introduced the discounted, or teaser, rate of around 8 per cent in January 2009, and was followed by other housing finance companies. The RBI felt that it was a ‘marketing gimmick'. Once the housing finance companies had adopted the scheme of luring new customers with easy rates, banks followed suit to stay in competition and the RBI was left biting its fingernails in apprehension of possible defaults at a time when it was raising its own key rates. Persuasion and disapproval worked with some banks, which abandoned the discounted rates; the SBI, however, stuck on with the conviction that its appraisals of customers' capacity to repay, even in a rising interest rate regime, differentiated them from the sub-prime kind of borrowers in the US and their attendant risks.

The RBI was not persuaded and, in its second quarter review last November, while raising its key rates once again, introduced higher asset provisioning of 2 per cent for teaser rate loans, against 0.4 per cent for normal floating rate loans. Mr O.P. Bhatt, who had pioneered the scheme, held his ground. For his successor, the issue was plain; stay with the scheme and set aside Rs 587 crore for provisioning. Mr Chaudhari chose to exercise the prudence the RBI had insisted upon and use that money productively: the SBI will be none the worse for that decision.

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