SBI withdraw Teaser Loans

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State Bank of India

Mumbai, Apr 21: State Bank of India, also commonly referred to as S.B.I., has withdrawn its controversial teaser rate home loans. To maintain the competitive edge the bank has restructured the mortgage rates. To retain the attraction of its customers, in its home and car-loan schemes the national bank has added the feature to refinance or pre-pay loan any time free of charge.

Interest rates after the restructure:
Loans up to Rs 30 lakh would be available at 9.5%
Loans between Rs 30 lakh to Rs 75 lakh at 9.75%.

Interest rates offered by its nearest rival, HDFC:
Loans up to Rs 30 lakh costs 9.7%
Loans up to Rs 30 lakh costs 10%

Till the time of the retirement, former chairman of SBI OP Bhatt had held that step-up rate structure should not be classified as teaser rate as it merely provided value for the customer without increasing risk.

The new chairman Pratip Chaudhuri, who took charge from this month, had indicated that the bank may have to set aside additional Rs 587 crore on its teaser loan portfolio if RBI does not grant a waiver.

Announcing the new rates, Chaudhuri said: "In order to continue to deliver best value to our customers, we are changing the interest rate structure which will be compliant with RBI's guidelines on tiered loans but will not result in a higher interest payout for the borrower".

The SBI has made the lending structure of car loans simple, new loans are at a flat 10.75%, and carries a spread of 2.25% over the base rate. "This works out to an EMI of Rs 1,670 per lakh which is sheer value considering market conditions," said Chaudhuri. Additionally as mentioned earlier, the car loan too can be paid before the due time without any penalty charge.

Chaudhuri said "We want to position ourselves as the most efficient lenders which is why we are giving borrowers the freedom to go to any other lender if they feel they are getting a better deal". He said that the pre-payment charges or penalty were probably seen as hidden costs by customers.

National Housing Bank, the regulator in charge of housing finance companies, bars lenders from imposing pre-payment penalty or charges if the loan is repaid with the amount that comes from borrower's own funds. But lenders are free to impose a charge or a penalty if the borrower has shifted his loan to another lender.

Krishna Kumar managing director of SBI in an interview to a TV channel said that the bank has been considering various factors like the the regulatory concerns, market conditions and competitors before withdrawing teaser loans.

Our View

The largest bank in the country took the right step to close down teaser rate home loans.

Teaser Loans have been designed to attract a home loan borrower in seeking a new loan. Initially, for two years these loans have a relatively low, fixed interest rate around 8 to 8.5 percent. However from the third year onwards, the rates revert to a higher fixed or floating interest rate, which would be subject to the then prevailing market rates.

RBI was of the view that teaser loans carry higher risk. For this reason it had increased provisions on such teaser loans by five times to 2% from 0.4%.

One of the many reasons for the financial crisis in 2008 was banks giving out extensive amount of money as part of the teaser loan in US during years prior to 2007. Therefore, RBI was correct in its view that they carry higher risk and hence provisions should be higher on such loans.

From a banking perspective, having a floater rate will protect its margins and prudent under current economic circumstances.

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