India's largest bank State Bank of India (SBI) recently sought a clarification from the Reserve Bank of India (RBI) for giving it an option of fixed-cum-floating home loans to borrowers. The bank says it has a fund strength to offer three, five or even 10 years of fixed interest home loans under its fixed-cum-floating interest rate proposal. Currently, most home loans given by banks are floating in nature, and there are no fixed home loan products. Some housing finance companies (HFCs), however, offer a two-year fixed home loan product, followed by a floating rate. Some suggest this leaves a regulatory arbitrage as one segment of the players are allowed to offer fixed-cum-floating rate, while the interest rate of an HFC would be slightly higher as compared to a bank.
Currently, there is no definition of a fixed home loan interest rate. As per an RBI circular, it is the loan interest 'fixed for the entire tenure of the loan'. It appears the SBI has sought clarity on this particular clause. SBI Chairman Rajnish Kumar said the bank couldn't fix a home loan interest rate for the entire tenure, say 30 years, given its asset liabilities management. "Will you get only a floating interest rate in this country?" asked the SBI chief. He was hinting that there's a scope of offering fixed-cum-floating interest rate under the current asset liabilities set up.
Kumar also made it clear that the bank was not proposing any teaser loan kind of product, which the SBI had introduced some years back in which there was a pre-decided fixed interest rate component for the first three years followed by a fixed interest rate. The slightly lower interest rate helped it lure borrowers. The RBI at that time objected to it, saying borrowers didn't understand the product as they got lured by a lower rate but had to pay more once the loan turned into 'floating'.
If the RBI agrees to the SBI's proposal, it would provide a big boost to the largest bank in the country. In the past decade, the home loan market has become competitive with little differentiation in terms of interest rates and product features. A fixed-cum-floating is a good option as interest rates have almost reached the bottom. Borrowers can take a view of locking period at the current fixed rate for their home loans for, say, three, five and 10 years.