SBI's teaser home loans set to pinch borrowers more

Bank will charge floating rates of interest from January.

Home buyers who had taken loans from State Bank of India (SBI) under the so-called ‘teaser rate’ housing loan schemes three years ago, will now have to pay more. The bank will start charging interest on these loans on a floating rate basis from January 2012.

The housing loan schemes — SBI Easy Home Loan and SBI Advantage Home Loan — were launched by the bank’s previous chairman, O P Bhatt, in January 2009, with a fixed rate of interest for the initial three years. The bank, which first modified the schemes and finally discontinued these after Bhatt retired, has Rs 25,000 crore in these two schemes.

According to senior SBI officials, about Rs 3,000 crore of home loans under these schemes will be charged on a floating rate basis in the January-March quarter. The interest rate is expected to increase by 175-225 basis points.

“About Rs 1,000 crore (teaser rate home loans) will move into the floating rate regime every month from January 2012. The rate of interest will be 10.75-11.25 per cent, depending on the ticket size,” a senior SBI official said, requesting anonymity as he was not authorised to speak to the media.

Under the SBI Easy Home Loan scheme, where the bank was offering loans up to Rs 30 lakh, the interest rate was fixed at eight per cent in the first year and nine per cent for the next two years. For home loans above Rs 30 lakh, the SBI Advantage Home Loan scheme offered eight per cent fixed rate of interest for the first year and 9.5 per cent for the next two years. From the fourth year, the interest rates on these loans were linked to the bank’s benchmark prime lending rate.

However, interest rates on banks’ loan products are now linked with the base rate, or the minimum lending rate, introduced by the Reserve Bank of India (RBI) in July 2010.

SBI would now link the teaser-rate loans to their base rates. The lender currently offers home loans at rates 75-125 basis points higher than the base rate. The bank’s base rate is 10 per cent.

Both the housing loan schemes were modified with minor changes in the interest rate before they were discontinued earlier this year.

The bank’s officials, including present chairman Pratip Chaudhuri, however, dismissed fears that a higher interest rate burden for home loan borrowers would further stress the lender’s asset quality.

“It will not dramatically increase the risk of defaults,” Chaudhuri told Business Standard.

SBI’s asset quality has been deteriorating in the recent quarters, with the delinquency rate rising amidst an uncertain economic environment. In the fourth quarter of 2010-11, SBI’s net profit fell 99 per cent from a year earlier, as it had to make higher provisions due to a rise in bad loans. The bank’s net non-performing ratio was 2.04 per cent while the gross bad loan ratio was 4.19 per cent as of September.

SBI officials said the bank had done due diligence before offering loans under the teaser rate scheme and remained confident there would not be any significant slippage in the portfolio.

“The bank had done due diligence on the repayment capacity of these borrowers while sanctioning the loans. We had tested if they could repay the loans once the rates hardened. Our customers were fully aware of the terms and conditions and this increase will not come as a surprise for them. We don’t expect any significant deterioration in credit quality,” said another official of the bank.

Also, since the interest rate cycle appears to have peaked, the floating rate on these home loans may come down once SBI starts reducing its lending rate. That would ease the repayment burden of its borrowers, SBI officials said.

The teaser rate loans did not find favour with RBI, as the banking regulator felt they would stress the asset quality once the rates were changed from fixed to floating. RBI raised the provisioning requirement on these loans to two per cent from 0.4 per cent, prompting banks and housing finance companies to withdraw such schemes. The SBI official said the bank had already made adequate provisions on loans given under the schemes.

Source: Business Standard