Interest rate challenge: RBI not in favour of fixed-cum-floating teaser loans

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Updated: September 19, 2019 7:09:16 AM

The central bank is likely to take such a view following comments from State Bank of India chairman Rajnish Kumar that the lender would seek clarifications from the RBI on whether it could offer long-term home loans with fixed rates in the beginning and floating rates later.

Rate challenge, RBI, teaser loan, Reserve Bank of India, industry news, banking news, SME loan,  State Bank of India, SBI, Rajnish Kumar In December 2010, RBI directed banks to make a higher provisioning for teaser loans in view of the higher risk associated with such loans.

The Reserve Bank of India (RBI) is not keen on ‘teaser’ loans, or fixed-cum-floating rate loans. Such loans offer customers a lower fixed interest rate in the initial stages and a floating rate framework for the remainder of the tenor. The product has been viewed by the regulator as a ruse to attract customers. “We have had difficulties with those. As we said at the time when we prescribed higher risk weights, we have a problem because it is pushing the risk to a future date,” sources indicated to FE.

The central bank is likely to take such a view following comments from State Bank of India chairman Rajnish Kumar that the lender would seek clarifications from the RBI on whether it could offer long-term home loans with fixed rates in the beginning and floating rates later. Kumar said there was some lack of clarity on how loan products could be priced after the RBI’s new regulations on linking interest rates on retail and SME loans to an external benchmark. Given the absence of floating-rate liabilities, Kumar was concerned this could make asset liability management “challenging”.

Sources said banks had complete flexibility on the liabilities side. “So they have to manage the cost of their liabilities and use the flexibility available to them.”

In December 2010, RBI directed banks to make a higher provisioning for teaser loans in view of the higher risk associated with such loans. In a 2010 notification, it had stated, “This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been observed that many banks at the time of the initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates.”

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