Level field for home loan players

State Bank of India scrapping its teaser home loan scheme is unlikely to impact market sentiment.

Developers see the decision by State Bank of India to suspend teaser home loans – loans at a discount for the first year or two - as inevitable but unlikely to impact buyers' purchase decision.

Representatives of housing finance institutions while agreeing with that view welcomed SBI's decision as it puts them all on even ground. Customers will bank on quality of service, information support in choosing a product and speed of delivery to decide on a lender of choice. The teaser loan may have been a useful marketing ploy in 2009 when the residential market was at a low. But offering a 15-20 year loan at a percentage point or 1.5 percentage points lower for the first two years and hiking the rates subsequently does not offer much savings for the borrower.

A home loan expert said, SBI might have grown faster than the industry average in the last two years, but could not have gained much . The higher provisioning norms of the RBI would have eaten into its margins. The two per cent provisioning, which is five times higher as compared with provisioning for other home loans, is just about the margin that is available in the business.

According to a research report by Edelweiss, SBI's home loan book under this scheme is about Rs 37,000 crore. It will have to provide about Rs 587 crore, an additional 160 bps (1.6 per cent) more over the prevailing provisioning norm of 0.4 per cent for these loans. However, this provisioning will be reversed once the loans revert to normal rates and continue to do well.

Little impact

A senior executive from a leading housing finance institution said the teaser loan offering by SBI had little or no impact in housing loan disbursals for any of the HFIs. Home loan providers had grown in line with the market and had met their growth targets. HFIs have grown between 20 and 25 per cent which is good by any standards. As a product the teaser loan had evoked some activity in a slow market.

Of greater concern is whether the anticipated upswing in housing loan interest will hit affordability of the buyers, the official said.

Mr Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance, which was among the last to get into the teaser home loan rates and the earliest to suspend it, said offering soft loan rates for two years on a 15-year loan can only be a lure. To the lenders, it is a short-term loss for a long-term gain.

Sundaram BNP Paribas which had pulled out the teaser loan offering in November 2010 did not see any drop in volume of home loan disbursal, says Mr Acharya.

Also, Mr Acharya said, borrowers are aware of the implications of higher interest rates after the initial discount period. Unless they are sure of their repayment ability, they do not opt for a loan, teaser or not. Also, housing finance providers had factor in borrowers' long term ability to repay. Doing away with teaser loans is not likely to have an impact on the market, he felt. Particularly, in a sober market like Chennai, the scheme is not likely to be missed but in some markets where valuations have spiralled upwards, there could be some impact.

Mr Suresh Jain, Managing Director, Vijayshanthi Developers, a developer with residential units spanning a wide segment, from about Rs 10 lakh a unit to about Rs 11 crore, said SBI's decision to call off the teaser loan is unlikely to affect a buyers' purchase decision. The move comes as no surprise with interest rates expected to increase.

The Edelweiss report says SBI has avoided the higher provisioning for teaser loans by linking home loans to the base rate without a discount in the first two years. The entry level home loan rates will be 9.5 per cent, which is a 100 basis points over the base rate while larger loans will range around 25-75 basis points higher. The rates move closer to that of other housing finance institutions such as HDFC and LIC Housing. The gap will be down to 25-50 bps.

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