Published & Updated as on - 2010-02-21

New Delhi, Feb. 11 -- Central bank proposes. Commercial bank disposes.

While the Reserve Bank of India (RBI) is frowning at "teaser" home loan rates that come cheaper to new customers, banks say they cannot honour old loans with the same rate as it could hurt their profitability.

RBI had raised serious concerns over teaser rates saying that these lack transparency and may lead to unviable loans - called bad assets. It also wrote a letter to the Indian Banks Association seeking explanation on teaser rates and asking banks to extend the same benefits to existing and old customers.

Keki Mistry, vice-chairman & CEO, HDFC told Hindustan Times that his firm had not received any letter but added that interest rates were a function of the overall cost of funds for banks. Some bankers said the cost depended on fixed deposit rates that cannot be altered easily.

"When the cost of funds come down the benefits are transferred to both old and new customers. However, the cost of fund has to come down in the existing balance sheet. It is so that one raises Rs 100 crore or Rs 500 crore and give out loans of that amount. But when the cost of fund changes, it changes only for the new money that comes in and so the existing customers continue to be at the same rate. These are the complexities," Mistry said.

Last week, RBI deputy governor K C Chakrabarty said that banks should not exclude one customer segment from a benefit extended to another.

Banksers squirm at this.

"Such rates have been offered to new customers based on their repayment capacity and whether they would be able to increase their monthly payment. It cannot be extended to the old borrowers whose credit repayment analysis have been based on other criteria," a senior official at a public sector bank said on condition of anonymity.

However, J.M. Garg, chairman and managing director, Corporation Bank said that the contours of interest rates may change after the implementation of the proposed referential base rates slated to be in effect from April 1.

Source: Yahoo Finance 11/2/10