SBI's Bhatt slams RBI on teaser loans

Mumbai: Outgoing State Bank of India (SBI) chairman Om Prakash Bhatt continued his defiance of the central bank on the teaser loan front saying "the Reserve Bank never understood our special home loan product".

"Obviously, they (RBI) have not understood our product (the special home loan product)," Bhatt, who is superannuating tomorrow from SBI after a five-year stint as chairman and a four-decade-old association, told reporters at the bank headquarters here today.

Reiterating that RBI's stance that SBI's special home loans are similar to the sub-prime loans lent in the US in the run-up to the 2008 global financial meltdown, Bhatt said this view is beyond logic as his offering is sold to those who are "absolutely credit-worthy."

However, he was quick to add that this is not a defiant stance with regard to the regulator but this is the view point of a bank that is the industry leader with a quarter of the entire banking business under its fold.

"Being the industry thought-leader and market leader, it is the duty of SBI to articulate our views to the regulator.

This has to be done in the interest of intellectual honesty and public discourse," he said However, Bhatt was quick to add that "but if they still insist that this cannot be continued and is against its norms, then we will comply...that does not mean that we don't have a view point on this - also, I would like to place it on record that so far, all through the five years of my tenure as the chairman, SBI has been 100 percent compliant with all the RBI regulations."

Following the ripple effects of the global financial meltdown that began with the fall of the mighty Lehman Brothers and many other Wall Street i-bankers beginning September 2008, the domestic economy decelerated from its high growth years.

Realty sector was one of the worst hit with banks treading cautious in lending to them.

This had a debilitating impact on the banking sector as credit growth trickled to a low single digit, leaving banks flushed with liquidity. Following this, the government nudged banks to lend at lower rates to middle-income households as it embarked on a fiscal expansion drive to pump-prime the slackening economy.

Being flushed with excess liquidity of over Rs 1 trillion, SBI was the first to launch a special home loan scheme in November 2009, under which it offered new home loans at a fixed lower rate for the first two years after which the loan would be reset to prevailing rates.

Though SBIs' competition, especially the pure-play mortgage lender HDFC that lost the No 1 home loan lender position to SBI, were critical of this product, following the success of SBI's offering, the entire banking industry followed suit.

As this became an industry trend, RBI began to worry about an asset price bubble and advised banks to discontinue the product. To dissuade them, in the November 2010 policy, the central bank had increased the provisioning for such loans by five times-from 40 bps to 200 bps. Following this, all the banks, barring SBI discontinued this scheme.

Pointing out that this special product is profit-making so far, he claimed that it will not turn out to be bad assets.

"In fact, there is no reason for a home loan to become a non-performing asset in the first place as the underlying value of the asset (property) would only be increasing over time.

"Secondly, our eligibility criteria is such that a borrower' EMI is never above 40 per cent of his/her net salary. And it is on this 40 per cent net income that we are offering the discount of say 2-5 per cent. From this point of view, there is hardly any chance of our special loan turning a bad asset," Bhatt explained.

Source: Financial Express