Amidst rising interest rates,
foreign banks in the country are making an effort to attract home loan borrowers by introducing dual rate or fixed-cum-floating rate products.
The top four foreign lenders in India – Standard Chartered Bank, Hongkong and Shanghai Banking Corporation (HSBC), Citibank and Deutsche Bank – have rolled out home loan products in recent months that offer a fixed rate of interest for an initial period before the rate becomes variable.
Bankers clarify that these products are not similar to the popular 'teaser rate' home loan schemes that had raised asset quality concerns. They claim that unlike the teaser rate schemes, the pricing of these new
dual rate products have been made transparent.
"We are not teasing the customers. The fixed rate offered is at par with the prevailing market rate. Customers are also made aware of the floating rate spreads at the time of making the agreement. The loan pricing is transparent and our dual rate product is different from those teaser rate schemes," a banker in charge of mortgage business of one of the foreign banks said requesting anonymity.
Bankers also said that the new fixed-cum-floating rate products do not attract additional provisions, which is mandated for teaser rate schemes.
In 2010, the Reserve Bank of India (RBI) had increased the standard provisioning requirement by five times to two% from 0.40% for teaser loans. The banking regulator was concerned with the practice of banks sanctioning housing loans at comparatively lower rates in the first few years and then resetting the rates higher. It felt that some borrowers may find it difficult to service the loans once the rate is revised high.
The discomfort of the central bank and additional provision requirement prompted banks including State Bank of India (SBI) to withdraw such products from the market. SBI had pioneered the scheme and was the first bank to offer such a product launching it in January, 2009.
"The regulator's discomfort was that banks were offering low rate of interest in the initial years in order to get customers and then revising the rates higher. In our case, the fixed rate is at par with the market rate. So, we are not enticing customers with a low rate in the initial years," said another banker with a large foreign bank in India.
Some of the foreign banks, as a matter of prudence, are sanctioning loans after reviewing the borrowers' capacity to repay at higher rates of interest. "The eligibility is decided after reviewing the repayment capacity of the borrower. We are sanctioning the dual rate loans only if we find that the borrower is capable of servicing it even at 50 basis points over the fixed rate," said the mortgage head of the foreign bank mentioned earlier.
According to bankers, the dual rate schemes were introduced following a demand from their clients for a housing loan product that offers fixed rate at least in the initial years.
"Many of our customers are high net worth individuals, who are aware of the current market situation. They expect interest rates to rise in the near-term but also feel that rates will come down in the medium-term. Hence, there was a demand for a product that will offer fixed rate for at least one or two years and floating rates thereafter," said a banker.
Citibank has introduced a dual rate home loan product where it is offering a fixed rate of interest, at 10.25%, for a period of two years. Borrowers will have to pay an interest at base rate plus 100 basis points after the expiry of the fixed period. The offer is available for the bank's new as well as existing customers.
HSBC is also offering
home loans at fixed rate for one year and floating rate thereafter. Deutsche Bank is offering its clients fixed rate home loans for one, two and three years following which customers are given an option to choose either fixed or floating rate. Standard Chartered Bank has also introduced a similar dual rate product.
Some of the Indian lenders including the country's largest mortgage player Housing Development Finance Corporation (HDFC) already offer dual rate home loan products.
