With the Reserve Bank of India tightening the norms on teaser home loan schemes,lenders ICICI Bank and HDFC Ltd have decided to discontinue with their teaser home loan schemes under which the loans are offered at a comparatively lower rate of interest in the first few years,after which rates are reset at higher rates. HDFCs scheme of dual rate home loan,which expired on Tuesday,will not be extended,an HDFC official said. ICICI Bank has withdrawn the teaser rates on home loans with immediate effect,the bank said. Its not clear whether state-run SBI would be discontinuing with the teaser rate scheme. Corporation Bank had discontinued the scheme last month. In view of the higher risks with such teaser loans,the RBI had earlier last month decided to increase the standard asset provisioning by commercial banks for all such loans to 2 per cent. Currently,provisioning is 0.4 per cent. The RBIs direction to the banks on provisioning would make teaser home loan slightly expensive. This practice (teaser rates) 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, the RBI said in its second quarter review of the monetary policy. The move by ICICI Bank and HDFC to stop teaser rates is expected to cool down the demand for housing loans and eventually help stabilise real estate rates in an economy faced with high inflation. The teaser loan schemes offered by banks became a hit among home loan seekers,leading to a revival in home loan demand. Under teaser rate,HDFC offered home loans at a fixed rate of 8.5 per cent up to March 31,2011,9.5 per cent for a period between April 1,2011 and March 31,2012 and the applicable floating rate for the balance term. Similarly,ICICI Bank had offered a rate of 8.5 per cent in the first year,9.25 per cent in the second year and 1.5 per cent over and above the base rate in the third year. The home loan scheme of SBI charges eight per cent interest for the first year,nine per cent for the second and third year. From the fourth year,the loan rate gets linked to the banks base rate. In its policy review meeting last month,the RBI had voiced concern over the high risk of default on loans offered at teaser rates. However,then many banks had expressed reservations,arguing that loan off-take would be impacted adversely. A section of the banking sector had advised the RBI to define teaser loan rates.
