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Teaser Rate End Impact

The only cure for reckless borrowing is to stop reckless lending

The Reserve Bank of India’s has finally eliminated the concept of teaser rates from the country’s home loan market. Along with its insistence that borrowers put down at least 20 per cent of the cost of a home for taking a loan, the home loan landscape has changed considerably. Both these measures have been taken to make the banks’ home loan portfolios safer by preventing marginal borrowers from accessing housing finance.

It’s notable that in India, ‘marginal borrowers’ mean two very different things. One type of marginal borrower is an actual end-user who tries to buy a house that’s too expensive for him. The other kind of marginal borrower is the housing ‘investor’ who uses home loans to finance his investments. This creature, which didn’t exist a decade ago, sees housing as a leveraged trade. Increasing the margin requirement from 5 to 20 per cent simply means that for the same amount of cash available, this ‘investor’ will buy fewer houses.

However, the impact of the two requirements on genuine home buyers will be very different. The 20 per cent rule is a reasonable measure for real users. Prudent lenders all over the world know that the amount of down payment is the biggest indicator of whether they’ll get their money back. No one should really be buying a house if they can’t cough up even 20 per cent its value. They should just reduce the size of the house they desire till 20 per cent of it fits into the cash they can spare.

However, the teaser rate rule may be a step backward. For many real buyers who are buying a house for living in it, paying less at the beginning of their loan and more a few years later fits their genuine capabilities since their incomes rise with time. Moreover, when someone buys an apartment in a project that isn’t ready yet, they are typically paying a rent while waiting for their house to get constructed. Paying a lower EMI comes in handy in such a situation.

It’s true that teaser rates create the scope for borrowers to overstretch themselves, but the cure for that is not to kill a facility that was genuinely useful for so many. The only cure for reckless borrowing is to stop reckless lending. There’s no substitute for bankers evaluating borrowers competently and fairly and then refusing loans to those who shouldn’t be getting them. Chopping and changing the product portfolio by the RBI won’t achieve that.

This Column first appeared in the Hindustan Times on 12 December, 2010.