SBI “teaser rate” on home loans will continue till March end

State Bank of India (SBI), India’s largest public sector bank, was the first bank to introduce the “teaser rates” on home loans. The bank has made it clear that it will continue with its limited period offer on home loans, popularly known as ‘teaser rates’ till the end of the current financial year, although there have been increasing differences with RBI on the issue.

SBI chairman OP Bhatt speaking on the sidelines of a function in Delhi on Tuesday, said,

“They’ve not objected. SBI would not do anything which RBI objects to”.

Over the past one month the central bank had raised the issue of teaser loans – the special rate home loans.

Meanwhile on Monday RBI deputy governor Usha Thorat had made it clear that banks must have taken whatever message was given by the RBI. Ms Thorat had last month said: “Teaser rates are increasingly being offered, which is a cause for concern.”

Another RBI deputy governor KC Chakrabarty had also expressed his disapproval by stating that the benefits of the scheme should also be extended for the existing customers.

The central bank had also pointed out that banks should provide the information about the implications of such rates to their borrowers and must appraise repaying capacity of the borrowers when the rates go up. Under teaser loans the loans step-up where interest rate is a low fixed rate in the initial years but is benchmarked to market rates after 2-3 years with a minimum floor.

In the next one month the teaser rate scheme of almost all banks is going to expire therefore the banks will be reviewing their limited period offers. Meanwhile Axis Bank has withdrawn the similar scheme after RBI has shown its concern over these schemes.

Moreover RBI’s hike of cash reserve ratio (CRR), the portion of deposits that banks have to maintain with the central bank, by 75 basis points to 5.75% will force banks to withdraw these schemes. The CRR hike is likely to absorb around Rs 36,000 crore from the system.

Mr Bhatt has also indicated that lending rates might be raised from the second quarter of 2010-11. He added, “So far as bank lending rates are concerned, I do not expect rates going up before May-June.”

SBI, this fiscal has set target to achieve loan expansion at the rate of 16-18 %. Mr Bhatt said, “We are already at 17% and there is no immediate pressure on interest rates.” On the other hand according to RBI the credit expansion target will be at 16-18% for this fiscal.

However on Tuesday, SBI launched its new scheme for Naval Personnel, under which it will be offering home, auto and personal loans at 50 basis points lower than the floor rate.