The perform among commercial banks of attract customers with beneficial interest rates on housing loans only to convert it into floating rates later is a cause for concern, Reserve Bank of India Deputy Governor Usha Thorat said Tuesday.

“In the area of housing loan, teaser rates are increasingly being offered which is a cause for concern,” said Thorat at a banking conclave in Mumbai.

“I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal.”

RBI’s concern can perhaps be traced to the fact that the genesis of the mortgage crisis in the US lay in home loan extended to borrowers who struggled to repay. These loans, popularly known as sub-prime loans because they were given to people in lower income groups, included so-called adjustable rate mortgages where the repayment is low in the initial months with installments rising in subsequent months, somewhat similar to teaser rates.

Lenders in India, however, say there is no cause for concern as far as quality of lending is concerned since repayment capacity is assessed based on the overall liability and not the first year’s rate. Many leading lenders, including the State Bank of India (SBI), ICICI Bank, Canara Bank, Punjab National Bank and Housing Development Finance Corporation (HDFC), have recently introduced such special offers to attract borrowers at a time when demand for loans from individuals and industries has been tepid.
The shift from lower Home loan interest rates to floating rates has often resulted in the monthly installments of borrowers to shoot up by as much as 50 per cent, along with the risk of the tenure of repayment also getting extended by several years.

Major housing loan providers including State Bank of India, which controls about 25 percent of the total loans and deposits of the country, and top private institutions like ICICI Bank and HDFC have been offering such teaser interest rates.

With the recent announcement by public banks to extend special home loan schemes offering credit at 8 per cent, buyers are actively applying in the anticipation of an increase in the Home Loan Rates in the coming weeks.

Witnessing a good response to these schemes, many public banks have extended the scheme till the end of this year with the State Bank of India (SBI) extending the deadline till March next year.
Among lenders, Central Bank of India and Punjab National Bank have decided to extend their special home loan scheme till December 31, while the Union Bank of India has decided to extend it till January 15.
SBI officials said an overwhelming response to the special three-month long scheme launched on August 8 this year prompted them to extend the November-8 deadline.
However, the processing fee on loans, which was waived for three months, has been reintroduced.
“In comparison to the previous year figures from April to October, this year, with the special home loan schemes in place, the bank was able to successfully disburse more loans in the region. Around 7,172 loans were disbursed during this year equalling an amount of Rs 42,635.42 crore against 6,800 home loans with Rs 38,53,600 crore in 2008,” said a senior functionary of SBI LHO (Local Head Office) in Chandigarh.
Under the ‘My Home Campaign’, SBI Home Loan offers in the bracket of Rs 5 lakh, above Rs 5 lakh and up to Rs 50 lakh and home loan as overdraft with the possibility of saving interest.
A senior official at the Central Bank of India claimed that the special home loan schemes which had been extended till December 31, 2009, had already generated a good response.
“Responding to the demand of extending the deadline from individual buyers as well as the real estate industry, the bank decided to give an opportunity to the customers to avail of these schemes for another two months. The bank is receiving an increase in the application on the daily basis,” the officer added.
While customers are making the most of the extended periods offered to them, banks are giving signals that these would not be extended any further.
Also, private banks are expected to increase the home loan interest rates soon.
“As the expiry period of special home schemes nears, customers rush to avail of the scheme. I shelved my plan to avail of the SBI scheme but have recently applied for it when it was extended,” said Kunal Malhotra, an employee at Dell in Mohali.

Punjab National Bank said it was extending till end-December an offer of cheaper rates on some home loans and car loans.
India’s No. 3 lender had earlier offered home loans below 3 million rupees at a fixed interest rate of 8.5 percent for the first three years and up to 2.5 percent below the benchmark prime lending rate for the remaining tenor.
An earlier cut in car loan rates by 50 basis points would also run till the year end, PNB said in a statement.
Media have reported banks like PNB and larger peer State Bank of India plan to withdraw by the year end such special schemes as home loan rates look set to harden.

The days of inexpensive home loans are drawing to a close as the Reserve Bank of India prepares to harden its key policy rates. Large public sector banks, such as the State Bank of India and Punjab National Bank, are reportedly planning to withdraw the special schemes that offer home loan rate as low as 8 per cent for the initial years.

With the RBI sending out signals of a tighter monetary policy, Home Loan bank may have to raise their home loan rates by January. Moreover, listed Indian banks may have to shell out more than Rs11,000 crore in the next one year to improve their cover towards non-performing assets to 70 per cent, as mandated by RBI’s recent monetary policy.

“Seeing the hawkish tone in RBI’s quarterly monetary policy review, the bank board thinks it may not be possible to continue with these schemes after the end of the current calendar year,” The Economic Times quoted an unnamed senior official with PNB, the country’s second-largest public sector lender, as saying.

While the special offers will be withdrawn from the end of the current calendar year, most banks are extending the festival offers, such as a zero processing fee, till then.

Currently, various banks are offering teaser rates for the first few years on home loans. Development Credit Bank is offering 7.95 per cent rate for the first year on their home loans. SBI, Dena Bank and Canara Bank are currently offering 8 per cent rate for the first few years.

After the offer period, such loans will be converted into floating rate loans.

Private sector banks, which were forced to offer lower rates after the announcement of special schemes by their state-owned rivals, are likely to hike rates once the public sector banks withdraw such schemes. Considering the fact that floating rate loan comprise a large part of the housing loan segment, any increase in rates will affect a large number of existing loans as well.