Is This The End For Teaser Rate Loans?

“RBI’s Monetary Policy Review:

RBI unveiled its second quarter review of monetary policy with the expected increase of 0.25% in the Repo rates (and Reverse Repo rates). This is most likely to lead to an increase in interest rates charged on various,loans,as also on deposits.

,There are also quite a few significant announcements in the policy relating to the,home loan,industry. Firstly RBI has now made its unease with,Teaser rate home loans,official by requiring banks to make an additional standard provisioning of 1.60% (an increase of standard provisioning from 0.40% to 2%). What this means is that for all outstanding teaser,home loans
the banks will need to make one time additional standard provisioning of 1.60% and in the future they will need to take into account this,additional,standard provisioning norms if they continue with the teaser rate schemes.

A quick back of the envelope calculation shows that SBI (which pioneered this scheme) would need to make an additional standard provision of around Rs. 400 – 450 crores (assuming that the entire disbursements from 2009 onwards were under the teaser rate scheme). Of course if they continue with the scheme they will also need to make additional standard provisions for any loans that they disburse. Official comment was not available as I am writing this but given the popularity of the scheme with the borrowers, it does look like the scheme will continue for now, maybe with increased interest rates. If SBI continues with the scheme then most of the other players will also be forced to continue with similar schemes. So, as of now, it does look like that there is still some time before we say good bye to the teaser rate schemes.

In another significant change the RBI has now regulated the,Loan,to Value ( LTV) ratio which means that if the value of the property is Rs. 50 lakhs the maximum,loan,that can be granted by the bank will be 80% of that or Rs. 40 lakhs. So far the LTV was unregulated but most banks would lend upto 85% of the value of the property. There are quite a few countries where the LTV is regulated but typically most such countries would also have government plans for down payment assistance for the needy first time home buyer. In the absence of such plans in India this may have an adverse impact at the lower end of the market. This is unlikely to affect the higher end of the market . Of course it will have some dampening impact on the 10% schemes popular in Mumbai where the down payment is only 15% (10% while booking and 5% on possession).

The increase in risk  weightage for loans above Rs. 75 lakhs will lead to an increase in pricing for such loans and hopefully dampen some of the speculation driven excess we have seen in real estate in Mumbai.

In another notable development, the deregulation of the savings bank deposit rate has been put firmly on the agenda with a discussion paper promised within this calendar Year.

It has also been indicated that there is less likelihood of the rates being raised in the future so after the current round of increases consumers shall hopefully see a more stable interest rates in the near future.
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