SBI’s new scheme: Teasing with ‘flexi’ loans

The bank had, however, refused to term it as the now-discontinued ‘teaser loan’. Rajnish Kumar, managing director (National Banking Group), SBI, was quoted by PTI as saying, “It is not a teaser loan. There is no change in interest rates and loan-to-value ratio. Taking into consideration the net monthly income of a customer, EMIs will be decided.” However, there is a sense in the market that such loans will end up increasing the risk within the system and chances of default by offering a debt which is over-and-above the financial ability of the individual. Some even termed it as a product similar to the one that caused sub-prime crisis in US in 2008.

“The basic premise of the product is against the principles of loan discipline as it promotes over-leveraging. For me this is a product that is similar to the ones that caused the sub-prime crisis in the US,” said the head of leading housing finance company on conditions of anonymity.

While financial advisors, too, point out the risk component with this product, Vishal Dhawan, a Mumbai-based financial planner said that the product may be useful for individuals who have a significant backup of assets that they can draw down upon and also for some skilled professionals who have certainty on their income growth.

However, Surya Bhatia, a Delhi-based financial planner, said that the bank needs to first educate and disclose the risks of the product clearly before offering a loan to a customer under the scheme.

How does it work?

SBI is allowing up to 20 per cent higher loan amount than those availed under normal schemes. So if a bank or housing finance company is offering a loan amount of Rs 50 lakh on a household income of Rs 1 lakh per month, the individual can get a loan of up to Rs 60 lakh within the FlexiPay Home Loan of SBI. The loan-to-value ratio however, will be as per the current RBI norms that allow loans of up to 75 per cent of the value of the property purchased. While the loan is being offered on a floating rate basis currently, the increase in disbursed loan amount and an increase in interest rate will take up the EMI payment for the individual after the fifth year as the loan has to be repaid within the agreed tenure of the loan.

“There is significant risk for individuals who go in for such loans as the debt taken is beyond the basic eligibility norms that are followed by banks and housing finance companies. It thus goes against the basic principal of how much of your income should go into paying EMIs,” said Dhawan.

Though, at first look it may seem to be very attractive for an individual, according to experts, there are a few elements that home buyers need to follow before they decide to go for a higher loan amount under the scheme.

Firstly, individuals must keep in mind that their EMIs can jump by around 20 per cent after the fifth year. Illustratively, if an individual goes for a Rs 50-lakh loan at the rate of 9.6 per cent for a period of 25 years under this scheme, the EMI for his interest payment for the five years would be Rs 40,000 per month. At the end of the first five years, assuming that the interest rates remain constant, for the remaining 20 years his EMI will jump from Rs 40,000 to Rs 46,933 at one go as his principal outstanding at the end of five years still stands tall at Rs 50 lakh. So the EMI in this case jumps by 17.3 per cent.

However, Jayanty Lakshmi, CGM at SBI said that “While only the interest component is payable in the first five years, between sixth and the eighth year there will be a nominal increase in the EMI. Only after the eighth year the customer will pay more as the loan has to be repaid within the initially agreed tenure.” She, however, said that the increase will not be much and as per SBI’s calculation the EMI for a Rs 75 lakh loan will only go up by anywhere between Rs 4,000 and Rs 5,000 after the fifth year.

Secondly, since the loan is a floating rate loan and not a fixed rate loan there is the ‘interest rate’ risk too. While in the example stated above the interest rate has been assumed to be constant, in case the rate goes up by 100 basis point over the five-year period, the EMI will rise further. So, if the interest rises from 9.6 per cent to 10.6 per cent, the EMI for the individual will jump from Rs 40,000 at the end of the fifth year to Rs 50,233 at the beginning of the sixth year.

It is also important to note that within the scheme, in an event of a rise in interest rates, the bank will not alter the tenure but will increase the EMI and hence the burden will be directly come on the individual. The third point to note is that the scheme assumes that the incomes will continue to grow and at the beginning of sixth year when the principal amount of the loan gets into the amortisation schedule, the individual’s income would have grown significantly over the first five years to be able to take care of the additional burden. Experts point that it is not fair to assume that individuals will see their incomes grow. “Even if income grows over the five-year period, generally they go into meeting other expenses in an inflationary environment. So an individual may find tough to suddenly shell out a high EMI after the moratorium period,” said a senior official in the housing finance department with a bank.

Bhatia said that by giving a loan amount of more than what the customer is eligible for the bank is stretching the customer and all the risks should be explained to the customer. “All customers don’t understand the nuances of such products and logically the bank needs to take a declaration signed by the customer that he has clearly understood the terms and conditions and the risks of higher EMI outgo after completion of the moratorium period,” said Bhatia, adding that there are higher risks of default associated with the product.