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Interest rate: riders keep homebuyers guessing
Source : The Hindu Property Plus Published On : 2009-03-07 City : Chennai

The limited period interest sweetener announced by SBI has turned home loan market competitive, but it also raises issues, writes K.T.JAGANNATHAN

Even as a few public sector banks followed the leader and announced a drop in interest rate on housing loans, the decision of State Bank of India to freeze interest rate to eight per cent has, as expected by many, it has raised many questions. The reduced interest rate from SBI is limited by period, as the offer will be available only up to April 30.

This lower interest rate offer, however, will be available for loans of all sizes for a period of one year from the date of disbursement.

This interest rate will be reset after one year as per contracted rate at the time of sanction of loan. This will mean that the EMI (equated monthly installment) of a home loan taker will increase from the second year onwards as loans below Rs.20 lakhs are reset at a higher four-year fixed interest rate and loans above Rs.20 lakhs reset at the then prevailing floating interest rate.

Real estate is indeed a key driver to economic growth. Also, it is among the biggest job provider next only to agriculture. SBI could not be faulted for doing its bit to help revive the sagging sentiment in this sphere. The SBI action is justified in the context of signals from the government to bring down interest rates.

Row out of a sweetener

The rider-filled limited period interest sweetener announced by SBI, however, has raised a lot of questions. ` There is an

Element of unusualness,” said a top official of a leading housing mortgage company. This sentiment was echoed by other leading bankers as well. Considering these, questions have been raised about the loan rate reduction. Why is the sweetener coming with a rider?

The public confidence in state-controlled banks has indeed risen. Not surprisingly, one hears of a strong movement of savings into public sector banks. Assured of this renewed confidence, SBI-led PSU banks are now advantageously positioned in the market place to set the agenda. Combined with a push from the government, they are now using current environment to give a big push to their business the same way the private players had used to do not long ago. If the name of the game is competition, SBI has certainly gone the whole hog to out-compete competitors.

A lesson

History, however, has taught us a lesson. Who would forget the six per cent interest offer made by ABN Amro to home loan seekers a few years ago? Many had hurried to seek home loans from ABN Amro only to regret later when the bank reset the interest subsequently. The hefty pre-closure charges had ensured it difficult for home mortgage buyers to get out when the interest rate moved up subsequently.

ABN Amro Bank, it may be recalled, made its foray into the housing loan segment in October 2003 with the lowest interest rate of 6.0 per cent in the first year and 6.5 per cent in the second year under its “Super Saver Loan Package’, targeting at least 10 per cent of the Rs 50,000-crore (Rs 500 billion) home loan segment. While announcing the lowest rate, the bank had said that from the third year onwards it would offer loans at the prevailing floating rate for all loans between Rs 100,000 and Rs 1crore (Rs 10 million). It had kept initial offer open till December 2003. What the SBI is doing now sounds very similar to the one announced by ABN Amro in 2003.

Once bitten twice shy. Not surprisingly, the SBI move on limited period interest sweetener has elicited similar concerns. The Reserve Bank of India too has reportedly expressed this concern and asked SBI to ensure that the transition to the interest reset-regime happens sans any major disruption to home loan takers.

Unfounded fears

The apex bank has reportedly asked SBI to give the loan takers some indication about the EMI they would be paying after the first year. Though the SBI has not exactly indicated the possible EMI after the first year, it has come out with advertisement indicating the limited period of the interest sweetener.

Fears – although unfounded ones – have also been raised over the possibility of the SBI move resulting in sub-prime kind of crisis faced in the U.S. Most home mortgage sellers offered very low interest rates for a limited period to woo customers. When the interest rate was reset subsequently and aligned to the market rate, it triggered huge problems, as the home loan takers could not pay increased monthly installments. The initial low interest rate offer saw everybody making a beeline to take loans. The ensuing rush had resulted in home loan providers chasing business and compromise on risk norms, in the process. The rest is history, as they say.

Given the current crisis of confidence, however, bankers will think several times now before lending. Also, loan seekers have also become discerning and smarter these days. In a perception-dominated real estate market, it is difficult to assume that a mere one-year interest sweetener will trigger huge home buying binge.

If you add this to general lack of confidence among bankers to lend, one is not quite sure on the possible impact of the limited period interest sweetener by SBI and other public sector banks.

Hopefully, the latest dose of reduction in repot rate by the apex bank would bring genuine cheers to common man. But the issues raised by the SBI initiative on the one-year interest freezes are bound to keep the competition in the home loan segment going for a while to come at least. LEGAL CHAT

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