Teaser rates gone for good – SBI
State Bank of India (SBI) has finally withdrawn the teaser rate home loan scheme because of rise in repayments for customers and majorly as the Reserve Bank of India stuck to its view that the product was akin to the US subprime loans that sank the global financial system. Their home and car loan schemes offer the freedom to refinance or pre-pay the loan any time free of charge.
Bank has now replaced the teaser scheme that has benefitted lakhs of customers with a new lending structure, which will raise interest payments for customers, but will not create discomfort between them and the regulator; they may even escape creation of provision of Rs 587 crore.
Current/New lending structure:
- Repayments will be a flat rate linked to its base rate, instead of a lower rate in early years that rose after three years.
Its total home loans are at Rs 86,000 crore, of which Rs 36,788 crore comprises of teaser loans.
What was the situation?
The central bank and former SBI chairman Om Prakash Bhatt were battling over the loans that had a fixed element in the early years of repayment, but subsequently moved to market-linked rates. While Bhatt defended this as a service to customers, RBI said it could destabilize the bank when the tide turned. The regulator increased the provisions for these kinds of loans, but SBI sought an exemption which the Reserve Bank turned down.
But RBI did not budge from their stand and even SBI’s competitors complained that it hurt the industry’s profitability.
RBI said: “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. 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.”
Competitors said: HDFC chairman Deepak Parekh 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”.
What SBI might try: May try to reduce the cost through some other means – like eliminating pre-payment penalty and slashing processing fee etc.
SBI does not believe in entrapping a customer against their wish.
Processing Fee: For home loans up to Rs 25 lakh is Rs 5,000, between Rs 25 and Rs 75 lakh is Rs 10,000 and above Rs 75 lakh is Rs 20,000.
SBI has also increased its lending rates (base rate and BPLR) by 25 basis points this week and restructured mortgage rates to ensure that they remain the cheapest.
Restructure – Home Loan:
- Loans up to Rs 30 lakh would be available at 9.5%
- Loans between Rs 30 lakh to Rs 75 lakh at 9.75%.
Its competitor HDFC charges 9.7% and 10% respectively. Had the teaser rates continued, SBI’s loans would have been more expensive than under the revised structure.
The teaser rates offered loans at discounted rates in the first three years but in subsequent years they were 1.25% and 1.5% over the base rate while under the revised rate they are only 1% and 1.25% over the base rate. (The base rate is the benchmark for all new loans).
Restructure – Car Loan:
- Offers loans at a flat 10.75% which is a spread of 2.25% over the base rate. This works out to an EMI of Rs 1,670 per lakh.
- The car loan too can be pre-paid without any charge.
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