In second quarter review of monetary policy (see this, this, and this as well), RBI took some measures to discourage teaser loans by Indian banks. This blog has always expressed displeasure over banks offering teaser home loans (see this and this as well).
There was both displeasure and confusion regarding teaser loans. People did not know whether the norms will apply to new or earlier loans. Then some bankers said they did not know the meaning of teaser rates. Then others said why only banks and not other nbfcs and housing finance companies?
RBI officials clear the confusion in its teleconference with researchers/analysts. From the transcript (the conversation is not crystal clear though):
Moderator : Thank you. The next question is from Suresh Ganpathy from Macquarie, please go ahead.
Suresh Ganpathy : I have some questions on the provisioning requirements on the teaser loans. First of all it is applicable from a prospective or a retrospective basis, I mean basically on the outstanding loans is it applicable or only for new loans it is applicable the provisioning requirement?
Shyamala Gopinath : It will apply even to the existing book.
Suresh Ganpathy : Why it has been only restricted to banks, I mean lot of NBFCs and HFCs are also involved in this teaser loan products, so is there a possibility that even they would be brought under this purview, the NBFCs as well as HFCs?
Shyamala Gopinath : Yes, as soon as the actual guidelines to the circulatory banks are issued it will be made applicable to the housing finance companies also and you are saying that even NBFCs are doing this?
Suresh Ganpathy : Yes, indeed, lot of NBFCs are into teaser?
Shyamala Gopinath : Not predominantly into housing finance.
Suresh Ganpathy : Some NBFCs who are involved in housing finance, there are lot of NBFCs who are involved in housing finance?
Shyamala Gopinath : But not registered as housing finance company?
Suresh Ganpathy : Yes, not registered as HFCs.
Shyamala Gopinath : We do regulate both NBFCs and HFCs.
Suresh Ganpathy : The definition of teaser loan rates; the problem here is that some of the banks are arguing that their loans are special home loan rate schemes and not teaser loan rate schemes, so how do you define what is teaser and what is non-teaser?
Dr. Chakravarthi : Which is neither fixed nor floating is called teaser loan.
Suresh Ganpathy : Okay, so any combination of fixed cum floating is called as teaser. Thanks a lot for your time.
I like this definition quite a bit. The home loans which are neither at fixed rate nor floating rate are teaser rates. RBI also clarifies that the norms will apply on old loans as well.
I know quite a few people who have opted for these teaser loans. Despite warning them, they said we will see how high the rates will become laters. Now most have also got letters from banks that no change in interest rate for 2- 3 years (or whatever the period of teaser loans). So it will be interesting to see what banks do now. Overall, it just increases the costs for the banks.
To be honest, I never understood this fascination of Indian banks to jump into home loan category. Thanks to banks, the realty sector once again got a bailout when a price correction was needed. As the global crisis started some realty sector was in trouble. But thanks (or no thanks) to the banks/HFCs/NBFCs they were bailed out via these cheap loans. Most banks started marketing their home loans aggressively and imitating competitors.
What is worse is that these teasers were extended much beyond the crisis re-fueling the price rise. The prices are much over their peak values and banks have played a major role in it. Remember, the price rise is much higher than it is reported. As around 40% of house value is via the cash market (unaccounted money) true rise is never really reported.
And now with RBI putting a LTV ratio of 80%, buying a home becomes even more distant for those not having “cash” (it is called ironically as cash as if it is some petty cash) with them. Though this blog supports a cap on LTV ratio, it should have been accompanied by some much-needed reforms in housing market.
It is a pity that banks let go off a great opportunity of cleaning up the mess in housing markets.
(More on this laters…)
Tamal Bandopadhyay has more insights.