Is this the end for teaser rate home loans?

The Reserve Bank of India, RBI, unveiled its second quarter review of monetary policy late last month with the expected increase of 0.25 per cent in the repo rates (the rates at which RBI lends funds to banks) and reverse repo rates (the rates at which RBI borrows from banks).

This is most likely to lead to an increase in interest rates charged on various loans including home loans as also on deposits.

There are also quite a few significant announcements in the policy relating to the home loan industry.

Firstly RBI has now made its unease with teaser rate home loans official by requiring banks to make an additional standard provisioning of 1.6 per cent (an increase of standard provisioning from 0.4 per cent to 2 per cent).

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What this means is that for all outstanding teaser home loans, the banks will need to make one time additional standard provisioning of 1.6 per cent and in the future they will need to take into account this additional standard provisioning norms if they continue with the teaser rate schemes.

A quick back of the envelope calculation shows that SBI (which pioneered this scheme) would need to make an additional standard provision of around Rs 400 to Rs 450 crore (assuming that the entire disbursements from 2009 onwards were under the teaser rate scheme).

Of course if they continue with the scheme they will also need to make additional standard provisions for any loans that they disburse.

Official comment was not available at the time of going to press but given the popularity of the scheme with the borrowers, it does look like the scheme will continue for now, maybe with increased interest rates.

If SBI continues with the scheme then most of the other players will also be forced to continue with similar schemes. So, as of now, it does look like that there is still some time before we say good bye to the teaser rate schemes.

In another significant change the RBI has now regulated the loan to value (LTV) ratio which means that if the value of the property is Rs 50 lakh the maximum loan that can be granted by the bank will be 80 per cent of that Rs 50 lakh which is equal to Rs 40 lakh.

So far the LTV was unregulated but most banks would lend up to 85 per cent of the value of the property.

There are quite a few countries where the LTV is regulated but typically most such countries would also have government plans for down payment assistance for the needy first time home buyer.

In the absence of such plans in India this may have an adverse impact at the lower end of the market. This is unlikely to affect the higher end of the market.

Of course it will have some dampening impact on the 10 per cent schemes popular in Mumbai where the down payment is only 15 per cent (10 per cent while booking and 5 per cent on possession).

The increase in risk-weightage for loans above Rs 75 lakh will lead to an increase in pricing for such loans and hopefully dampen some of the speculation driven to excess we have seen in real estate in Mumbai.

In another notable development, the deregulation of the savings bank deposit rate has been put firmly on the agenda with a discussion paper promised within this calendar Year.

It has also been indicated that there is less likelihood of the rates being raised in the future so after the current round of increases consumers shall hopefully see a more stable interest rates in the near future.