PM's adviser wants teaser loan guideline

There is bad news for the teaser home loan club. The latest person to sound an alarm bell on these products is none other than prime minister’s chief economic advisor Kaushik Basu. Raising the issue of teaser home loans, Basu on November 16 called for regulation of these products.

"I am not in favour of banning teaser rates. We can have independent experts who can prescribe about them like doctors prescribe steroids. My view is that we can have professional body, which will have a right to say whether you are making a good judgement or not...," Basu said at a summit at the International Management Institute. Teaser loans are multi-year loans where lenders offer concessional rates to borrowers initially and charge high rates subsequently.

"I am acutely aware of over-regulation... At the same time, there is no getting away from regulation. Having a prescription means there are dangers, but also there are values in the product," he said.

The Reserve Bank of India has been constantly sounding its distress over these products. In its recent credit policy review, the apex bank said there is a high risk of default on these loans and had tightened the noose around this product.

It said most banks are not taking into account the repayment capacity of the borrowers at normal lending rates at the time of initial appraisal.

RBI went on to slap certain strict norms, asking banks to keep more money aside for offering such products to provide a cushion against any default. Also, the apex bank raised the limit of margin money from 15 per cent to 20 per cent

The apex bank even went to extent of appealing to banks and home finance institutions to do away with these products.

Home finance major HDFC had later appealed to banking leader State Bank of India to get rid of the product, but SBI sounded averse to discontinuing the product. Defending it, SBI chairman OP Bhatt said the product is popular and there is nothing wrong in it.

Basu raised an alarm bells by trying to draw parallels with the US subprime mortgage crisis and the role of teaser home loan interest rates in it. However, he said the action to regulate these schemes should be decided on a case-by-case basis.