Don’t ban, instead monitor teaser loans strictly: Kaushik Basu

NEW DELHI: A top policymaker has called for monitoring of concessional housing loans, soon after the central bank raised concerns over such loans and made it costly for banks to extend them.

Instead of banning teaser rates, independent experts could be asked to keep an eye on them, chief economic advisor Kaushik Basu said. “We can have a professional body that will have the right to say whether you are making a good judgement or not,” he said on Tuesday.

The Reserve Bank of India has repeatedly raised concerns over such loans and said banks need to explain to their borrowers about the implications of such rates and to appraise repaying capacity of the borrowers when the rates go up.

After its warnings went unheeded, RBI directed banks to increase the provisioning on teaser loans in its November 2 policy review to make such loans less attractive .

The provisioning requirement was raised from 0.40% to 2%. Mr Basu recalled the role of such loans in the US subprime crisis, and said regulation of the schemes announced by various banks should be decided on a case-by-case basis. “I am acutely aware of over-regulation ... At the same time, there is no getting away from regulation . Having a prescription means there are dangers, but also there are values in the product,” he said.

“Financial markets will need regulation ... financial products will have to be regulated,” said Mr Basu.
Banks, however, have said that such decisions should be left to the bank’s management as it is the cost of funds for each bank that determines the interest rates and bank’s business strategy.