Tease Me Tease Me!

HDFC has cut its base rate by a steep 35-basis point, but SBI Chairperson suggests teaser loans to revive the property market. RBI Governor, however, feels lowering of home prices by developers is the only way forward.

The day HDFC Bank cut its base rate by 35-base points to bring it down to 9.35 per cent, far below the 9.7 per cent that leading lenders, like SBI and ICICI offer, the move spooked banking stocks. None of the major banks, however, are yet to follow with similar cuts of their own. SBI Chairperson Arundhati Bhattacharya, who doesn't miss a chance to speak her mind, however, feels we better go back to the teaser home loan days of 2009. Sharing centrestage at a recent Mumbai event with big man Raghuram Rajan, RBI Governor, she suggested for a limited period, “home loans could be given at below base rate for the already heavy stock of housing.” It was the same event where Rajan said: “It would be a ‘great help’ if realty developers sitting on unsold stock bring down prices … Once the prices stabilise, more people will be keen to buy houses … I think we need the market to clear.” Rajan said with growing unsold stock, “we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up.” But why teaser loans, Ms Bhattacharya?  “Today, the base rate is 9.7%. I am told that real estate inventory is at a two-year high and I was thinking if it is possible for a little while… could something of this (teaser loan) kind be allowed,” she said.

According to her, this will encourage more people to take on a home loan and buy homes. Ms Bhattacharya feels will help in clearing the inventory of unsold homes. But when the big banks are already wrestling with the problem of stressed assets and increasing NPAs, is it a wise move to go for teaser loans targeting mainly the middle class to revive the property market? She doesn't need to understand that teaser rates are meant to tempt borrowers who have little knowledge of finances into taking a home loan. A large number of such borrowers are not financially astute to understand the implications of teaser loans. I remember the wise old man of Indian banking, Deepak Parekh, Chairman, HDFC, terming teaser loans a “marketing gimmick”. Now Parekh didn't say it because it was SBI that started the teaser game in 2009 and everyone was forced to follow the jumbo. “Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners,” Parekh explained the risk. “Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.” What he meant was if SBI were to launch a teaser rate home loan right now, every other bank would launch a similar product in quick time. This would increase the overall risk in the financial system. The supporters of teaser loans, however, say that Rajan is not right in barring banks from offering teaser loans, which should be seen as a commercial decision solely within the realm of marketing choices that banks make. That's alright, but what does the buyer do? Builders say an increase in the cost of land and other input costs over the last few years do not give them leeway to bring down prices. So most realtors hold on, hoping to outwait the buyers. So, the market basically needs correction but no one seems to know how to go about it. Teaser loans make sense for salaried borrowers, who often pay both a rent and the instalment on their home still under construction. When the home is ready for them to move in, and they no longer have to pay rent, they are okay with a higher rate of interest. Further, young people who buy homes also expect their incomes to go up in two-three years. Teaser loans suit the borrower and the lender. Why should the RBI say no? Not sure of the economy?