Base rate rise to decide fate of SBI's teaser scheme

State Bank of India (SBI), set to review its base rate on December 30, will also decide on extending one of its most popular, albeit controversial, products - 'teaser' home loans.

According to a senior executive of the bank, the magnitude of increase in the base rate will be a key factor influencing the decision to extend the dual-rate home loan scheme, which expires on December 31.

To deploy excess liquidity, SBI had pioneered the product in February 2009. The Reserve Bank of India (RBI), however, is uncomfortable with such a product and says higher payouts by the borrower in later years increase the chance of a default.

At present, SBI's base rate stands at 7.6 per cent. The teaser scheme charges are eight per cent in the first year and nine per cent in the subsequent two years. According to the RBI guidelines, a bank cannot price any loan below its base rate.

Therefore, if SBI's base rate crosses the eight-per cent mark, either the product will have to be discontinued or the bank will have to offer a new rate - not less than the base rate - for the initial years.

Base rates of most public sector banks are 8.5-9 per cent, reflecting a sharp rise in the cost of funds in recent months.

However, with almost half its deposits being low-cost in nature, SBI has an advantage. As a result, an increase in the bank's cost of funds is likely to be of lesser magnitude than other government-owned banks.

Thus, when most public sector banks increased their base rate by 50 basis points (bps) in October, SBI raised it by 10 bps only.

SBI officials have indicated against a base rate increase of more than 20 basis points. In that case, the bank would be in a position to continue the teaser scheme.

This is also the first time the bank will review an extension of the scheme after RBI increased the provisioning requirement for such schemes.

During its second quarter review of the monetary policy, RBI increased the provisioning requirement for teaser schemes to two per cent - a five-fold increase.

Following the move, Corporation Bank withdrew the scheme. Punjab National Bank also announced a withdrawal from January 1.

According to estimates, SBI's provisioning due to teaser products will go up by Rs 350 crore.