No more teasing

The Reserve Bank has for some time now frowned upon the widespread banking practice of giving teaser loans. These are loans,usually home loans,on which the introductory rate of interest for the first year or two is fixed at a lower level than the floating rate of interest that will be charged subsequently. In its latest monetary policy review this week,the RBI actually increased provisioning for teaser loans to 2 per cent from an earlier norm of 0.4 per cent. This will discourage banks from handing out teaser loans. In theory,there’s nothing wrong with offering a loan with a discount on the repayment for the first year or two. But for this system to work properly and fairly,consumers must be well informed and given the full details of the risks involved by the banks. At the moment,it isn’t clear if either of these conditions is being fulfilled adequately.The danger with this is that people could take on loans which they cannot afford to pay back later. That is,of course,bad for the individual who has taken the loan but it’s also bad for the bank’s balance sheet. There’s an additional complication with housing loans. Home buyers generally proceed with the assumption that the value of the house that they are buying will always increase — it’s not an altogether unreasonable assumption because we haven’t really had a serious housing prices bust in India,so far. That kind of assumption can incentivise the sort of risk which can have a serious downside if a crash does happen — remember,the global financial crisis of 2008 actually began with a housing bust in the US in 2007. The RBI has tried to disincentivise such risk-taking by capping all home loans at 80 per cent of the value of the property. That is sensible and will prevent people making a gamble on the future appreciation of the price of property. Apart from setting rules,the RBI should also encourage banks and financial institutions to spread more consumer awareness on these issues — that is as good a preventive for bad practices as rules are.