Teaser loans are legitimate products: RBI deputy governor

Reserve Bank Deputy Governor K C Chakrabarty on Tuesday said the central bank has not banned the controversial teaser rates, but said banks may have to make additional provisioning for such loans.

"We have not banned teaser rates. It is a legitimate product," Chakrabarty told reporters after interacting with the students of Mumbai's St Xavier's College.

His comments came a day after mortgage major HDFC launched a special home loan product giving borrowers the choice to opt for fixed interest rate for the first 3 to 5 years after which borrowers would be shifted to floating rate.

Late last month, private sector lender ICICI Bank had also launched a similar product.

When asked specifically if the recent product launches will attract additional provisioning, he said, "If the rule is there, it will attract (additional provisioning)."

Industry observers have been pointing out that these products have some characteristics that are similar to teaser home loan schemes, launched by the State Bank in late 2009 and aped by others.

"(A product) which is neither fixed nor floating is called teasing. So, those interest rates which are a mixture of these two is called teasing," Chakrabarty explained while interacting with the students.

Fearing an asset bubble build-up and to contain the impact, the Reserve Bank had increased the provisioning for such assets five-fold to 2 percent.

Following this, a slew of lenders, including the country's largest lender State Bank of India, had withdrawn their products which fall under this category.