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Teaser loans a rude shock for many homebuyers when interest rates shoot up; RBI right to decline SBI’s idea from Day One

‘Teaser loans’ are back on the discussion table. Country’s largest lender, SBI wants it but the Reserve Bank is reportedly not keen to let banks bring back this product. Back in 2010, State Bank of India (SBI) had introduced teaser loans but rolled back after just a year following disapproval from the Reserve Bank of India (RBI).

What are these loans? Teaser loans would carry a lower fixed rate of interest in the initial years which will jump to a higher floating rate after a specific period. The RBI was concerned that such a product with an attractive lower rate in the initial years would lure borrowers who will subsequently get a shocker in the second phase when the rate of interest jumps significantly adding to their repayment burden. At this stage, the borrower’s interest rate calculations can go wrong, adding to his financial burden.

In 2010, shortly after the launch of these products, the RBI had imposed higher risk weight on such loans to discourage banks from offering this product to borrowers. This made these loans unviable to banks and they withdrew it in 2011.

What happened now? Recently, SBI chairman Rajnish Kumar pitched for these loans again saying the bank will seek clarification from the central bank on whether the bank can launch home loans carrying fixed rates at the beginning that will switch to floating rates after a while-which is what teaser loans did.

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