Of teaser loans and prepayment ::Business Line

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Prepayment is a proof of financial discipline that must be lauded, even if it could have a temporary adverse effect on the finances of the lender.

Last year, Mr O.P. Bhatt, the then CEO of State Bank of India, was at the receiving end of a hostile press for persisting with teaser schemes for home-loan seekers.

The US variety of teaser loan indeed was reprehensible as it was an inseparable part of the overall process of loan appraisal that cast caution to winds so as to grant loan even to the ‘Ninja' (no income, no job, no assets) category despite knowing that the loans were non-recourse, unlike in India where in addition to the mortgage, the lender has other assets of the borrower to fall back on in case of default.

Be that as it may, the truth is there is nothing inherently wrong with teaser-loan schemes or, for that matter, with the houses-for-all slogan that has a potential to morph into a policy, given the multiplier effect a housing boom would have on the somnolent economy, besides addressing the vexed problem of slums lying cheek-in-jowl with swanky bungalows and apartments with their deleterious consequences for the nation and economy.

PREPAYMENT

The Reserve Bank of India's advisory to banks to not impose prepayment penalty if a housing loan is squared away ahead of its tenure, especially if it carries floating rates of interest, has not come a day soon.

It concedes that there may be some extenuating reasons for charging prepayment penalty in case of fixed-interest loans, given that there could be a back-to-back tie-up between the loan and its source of financing. But for a floating-rate loan, there is absolutely no case for penalising the borrower.

The RBI is on the dot, except that the rider that the borrower should be prepared to prepay from his own sources, which means he should not be asking a new bank to pay off the loan, may be a tad hard on him, in addition to the difficult task of proving that the prepayment is from his own sources.

The banking ombudsman can certainly work out a compromise formula, especially when a borrower is unable to take on the might of the lender.

HOUSES FOR ALL

Houses for all was the US mantra to end the prolonged spell of recession after the Second World War, though, as pointed out earlier, its banks were clearly guilty of going overboard and casting all cautions to wind. The Chinese by and large have made ownership of a house the minimum qualification for a groom-to-be. There is much manna for a house-owner in India, too. Besides reigniting steel, cement, paint and other assorted industries and giving jobs to a large number of people, a house in the making or whose EMI is in progress is a great disciplinarian, calling for concerted actions on the part of each of the family members, requiring parsimony and eschewing of extravaganza and vices.

Let therefore our mortgage financiers by all means tease and inveigle borrowers but sign up they must only after a thorough test of repaying capacity.

And when a borrower wants to prepay he must be patted on the back instead of being given a dressing-down. After all, prepayment is a proof of financial discipline that must be lauded, howsoever grudgingly, even if it could have a temporary adverse effect on the finances of the fixed-interest rate lender.

PORTABILITY

If there can be number portability in the telecom sector, there is no reason why there cannot be account portability in the housing-loan business.

It is unreasonable to insist that a borrower should be condemned to a high rate of interest in a competitive market where housing loans are seen as a low-risk-high-volume business.