The fixed-cum-floating rate home loan schemes, also called teaser rates were introduced in the markets in December 2008. The Reserve Bank of India (RBI) has expressed concerns over the risks involved in such schemes as consumers may have to render higher payments if the interest rates are hiked.

RBI cautioned the banks over the 8 per cent interest on loans offered to the customer and over the huge investments by banks in mutual funds. The controller expressed concerns as the bad loans in the country are on the rise.

Usha Thorat, deputy governor of RBI expressed that the teaser rates were worrisome and said, “In the area of housing loans, teaser rates are increasingly being offered which is a cause for concern. I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal.”

The scheme has now been planned to be offer similar rates in other segment as well. It is to be noted that nearly 75 per cent of the loans for most banks are at a price which is below the benchmark prime lending rate. A committee under Executive Director Deepak Mohanty had reviewed the benchmark prime lending rate system and recommended that the base rates linked to one-year cost of funds should replace the system.

On the home loan segment many banks including SBI, Axis Bank and ICICI Bank have offered a special rate for the fist two years and then the rate charges on the basis of floating rate.

Consumers may experience payment shocks as the floating rates goes up when the interest rates rises. To help the recovery of the economy RBI had brought down its key lending rate by 425 basis points between October 2008 and April 2009.

Bankers however say there is no reason to be worried as they have taken into consideration the payment capabilities of the customers. They also expressed that the lending norms were strict and the schemes were explained in clear details to all borrowers.

SBI said in a statement that these schemes have revived demand in the segment for the bank and the 8% loans had not put any pressure on the bank's margin instead helped improving them. The Central Bank of India chief too defended the schemes and said the loans were for a longer period of time which reduces risks. He also outlined the difference between the US and India market saying in India the payment capacity of the borrower is also checked before loans are given.

On the other front, Thorat expressed concerns over the huge investments by banks in mutual funds which made banks heavily opt for short-term debts. Banks have invested a total of Rs

1,60,000 crore in various schemes offered by the mutual schemes.

“Banks that have large investments in MFs have to be sensitive to the liquidity risk in the event of the need for sudden redemption by large investors at the same time,” she added.