Bhatt of State Bank of India rejects Parekh offer to end teaser rates

Our Bureau MUMBAI

THE chairman of India's largest bank and the head of the country's largest mortgage finance company are sparring over scrapping the so-called teaser rates, highlighting the tough competition to dominate a market perceived to be safe, at least for now. State Bank of India chairman OP Bhatt ruled out lenders collectively deciding to do away with teaser rates, ignoring a suggestion from Housing Development Finance Corp chairman Deepak Parekh.
    "The special home loan scheme is a desirable product for consumers and profitable for our bank," Mr Bhatt told reporters on the sidelines of a banking summit organised by the IBA and industry group Ficci. "No one can claim that the special rate loans are not good for the customer."
    This is in contrast to Mr Parekh, who said, "I would like to see it die down, but it must be done universally, because there are many people who talk on a one-on-one basis that we don't like this product. It is a product which has caught the fancy of individuals."
    Teaser rate loans are multi-year loans that bear low monthly repayment in the initial 2-3 years. It shoots up substantially in the subsequent years, straining consumer's finances which in some cases leads to default. This was said to be one of the causes of the bubble in the US real estate market that collapsed leading to the worst-ever recession since the Great Depression of the 1930s.
    SBI charges 8% in the first year, 9% in the second and third year after which it moves to market rates. HDFC charges 8.50% up to March 2011, 9.50% up to March 2012, and floating rate after that. Mortgage business stable so far
INDIAN lenders led by SBI and HDFC have been competing to increase their share of mortgage business which so far has proven to be a stable one without high delinquencies unlike lending to companies and personal loans. But the fears that lenders may be compromising on standards is rising with the Reserve Bank of India tightening provisioning norms for such loans.
    "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," RBI governor Duvvuri Subbarao said on November 2. "It has been observed that many banks, at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates."
    Mr Bhatt said the bank would review its special rate loan scheme at the end of the quarter. Defending the special scheme which offers better deals for new borrowers, he said the scheme was born out of compulsion to deploy the surplus funds it got when investors chased safety after Lehman Brothers collapsed.
    SBI and HDFC account for more than a third of all home loans given in the country where both claim leadership.
    The special home loan scheme was first devised by the Indian Banks' Association, which offered loans up to 5 lakh at 8.5% and between 5 lakh and 20 lakh at 9.25% for the first five years.

I would like to see it (teaser rates) die down, but it must be done universally, because there are many who talk on a one-on-one basis that we don't like this product
DEEPAK PAREKH CHAIRMAN, HDFC

The special home loan scheme is a desirable product for consumers and profitable for our bank. No one can claim the special rate loans are not good for the customer
OP BHATT CHAIRMAN, SBI