LICHF look for clarification on teaser rate model
Home loan provider LIC Housing Finance has sought a clarification from the National Housing Bank (NHB) on its provisioning requirement on “teaser” mortgages loans-where rates are lower in the initial years and rise subsequently.
The home finance company has sought a clarification after the SBI refused to make any provisions on similar dual rate loans on the grounds that they are not teaser rates. The NHB plans to refer the matter to the RBI. The central bank’s final stance could determine the course of home loan rates.
In its previous policy review, the RBI increased provision requirements five-fold on teaser loans to discourage banks from extending the scheme. Lenders need to keep aside a very small portion of their earnings as provisions to make good any future defaults. For regular loans, the provisions are 0.4% of advances. However, in the case of teaser loans, the RBI said that provisions need to be increased to 2%. The NHB, which framed its regulations on RBI guidelines, has asked housing finance companies to comply.
The SBI, the country’s largest bank, says these home loans, which form part of its special scheme, are not teaser rates plans, which fell into disrepute in the US in the wake of the sub-prime crisis. The SBI has the largest home loan portfolio of over Rs 82,000 crore and a large part of it was advanced in the last two years. Last week, while announcing the bank’s results, its chairman O P Bhatt said that RBI’s definition of teaser rates did not cover SBI home loan offering since the risk in its product was in no way higher than a regular loan.
Following the RBI’s new provisioning norms, the ICICI Bank, HDFC and a host of public sector banks discontinued their schemes. The SBI and LICHF are the only lenders which have a home loan product with differential interest rates. HDFC has made a provision of Rs 292 crore after using its excess provisioning. LICHF has made a provision of over Rs 200 crore towards the additional provisioning on teaser loans although its initial rates are not at a discount. The mortgage company extends loans at a fixed rate of 9.75% for the first five years. For the remaining tenure, the loans will be linked to market rates.
At present, most home finance providers are maintaining their rates to remain competitive vis-Ã -vis HDFC. For instance, LICHF and ICICI Bank continue to provide loans at 9.75%, the same rate as HDFC, for large loans above Rs 30 lakh. HDFC is understood to be keeping a keen eye on SBI, which continues to have a dual rate structure where the rack rate for home loans over Rs 30 lakh is 9.75% (base rate plus 1.75%). However, the state-run lender offers a discount of 1.25% over the prevailing rate for the first year and 0.5% for the second year.
When contacted, an ICICI Bank spokesperson said: “We are not seeking any clarification. We have already made the required provisions.”
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