Scrapping teaser loans may not impact affordability for home buyers, experts say

There is a feeling that replacing the very popular special loan scheme with floating rate schemes will not make much of a difference

Experts think that the move by the State Bank of India (SBI) to scrap teaser home loans will have no impact on prospective home buyers.

SBI, the country's largest lender, has finally fallen in line with the diktat of the Reserve Bank of India to discontinue teaser loans, and announced last week that it was replacing the special home loan scheme with floating interest rate schemes from 1 May 2011. Several other banks have already stopped the teaser loans scheme.

Some sector commentators think that discontinuation of this popular scheme would impact the decision of new home buyers, but there are others who believe that it will have little or no impact on customers.

"From the affordability angle, there will be no impact", says Mrunal Duggar, vice-president, residential services, Jones Lang LaSalle India. "The loans were misleading and lured customers into a false sense of security by offering lower interest rates for the initial years. Sensible buyers would not opt for such loans anyway, so it will not impact their purchase decisions."

The teaser scheme offered an interest rate of 8-8.5% during the first three years, after which, the borrower had to pay according to floating rates. The scheme did attract a large number of borrowers, which is probably also why SBI's former chairman OP Bhatt continued with it, despite misgivings by the RBI. The RBI said the scheme resembled the US sub-prime scheme which precipitated the financial crisis in 2008.

The discontinuation of the scheme would result in higher interest rates for customers, but that would level out over the long term. Ms Duggar says, "The teaser scheme would charge the borrower a higher rate after three years, which would come as a shock anyway. Home loan repayment being a long-term process, a concession during the initial years will not have helped customers anyway."

It has been reported that fewer people are opting for home loans recently, and preferring rented accommodation instead, on account of exorbitant property prices. This is indicated by sales and sales registration figures in Mumbai that have dropped since last year.

Despite an increase in the home loan limit in the Union Budget this year and various discounts offered by developers, buyers are staying away from making new purchases as prices have gone through the roof and beyond the budget of the average salaried people. In this situation, the discontinuation of the teaser loans is unlikely to make a noticeable impact.

The market also welcomed the announcement by SBI, as investors believed teaser home loans had an adverse impact on the bank's margins. Edelweiss noted that "the bank had continued with its special schemes, despite RBI's notification for higher provisioning, stating that special loans did not fall under the 'teaser' category."

Now, Pratip Chaudhuri, who took charge as chairman of SBI this month, says that the increase in deposit rates had forced the bank to take this decision.

Other home loan providers like HDFC and ICICI also provided teaser loans initially and later withdrew them. They will be relieved now, as SBI's decision will put them on a level playing field. Although SBI could still offer lower rates by doing away with the pre-payment penalty and discounting processing fees.


Govt to look into reasons for fall in gas output from Reliance fields

The Directorate General of Hydrocarbons has already sent a fact-finding mission to KG-D6 fields to ascertain reasons for the decline in production. The three-member team lead by Gautam Sinha, head of production at DGH, will review well-wise production and reservoir performance of KG-D6 fields

New Delhi: Going into an overdrive, the government has called an official meeting next week to review the reasons for the fall in production at Reliance Industries’ (RIL) KG-D6 fields, and has ordered the company to stop natural gas sales to non-priority users like Essar Steel, reports PTI.

A meeting of the management committee that overseas the operations of the KG-D6 fields has been called next week to “ascertain reasons” for RIL not meeting its drilling commitment and the drop in production, oil secretary S Sundareshan told reporters here.

Reliance had in 2006 won government nod to invest $8.836 billion in Dhirubhai-1 and 3 fields in the KG-D6 block after promising an output of 61.88 million metric standard cubic meters a day (mmscmd) from 22 wells by April 2011 and 80 mmscmd from 31 wells by 2012.

But the situation on the ground has been markedly different with Reliance only producing about 42 mmscmd from 18 wells drilled so far on D1 and D3 fields in the Bay of Bengal block. Another 8 mmscmd is produced from MA oilfield in the same block.

“A formal meeting has been called next week in which representatives of the oil ministry, the Directorate General of Hydrocarbons (DGH) and the contractor (Reliance) will be present,” he said.

“After ascertaining the reasons, we will take appropriate measures.”

“These are fields which have come into production after monumental effort... we do not come to abrupt judgements on these matters,” he said when asked if the government was contemplating levying any penalty.

“It is difficult at this juncture to comment on why production has fallen (and) it is too premature to talk of action,” he said.

Mr Sundareshan did not elaborate on the “measures” the oil ministry would take, but sources said the Production Sharing Contract (PSC) does not provide for levying of any financial penalty on a firm not meeting its drilling commitment during production stage.

The PSC provides for levy of liquidated damages only in case a company does not meet the commitment it had made for getting the block. Penalty is levied for the part of the minimum work programme (MWP), committed at the time of bidding for the block, that is not completed.

KG-D6 wells have over the past one year shown increased water production and some of them are on the verge of ceasing. Also, there has been fall in pressure at the wells.

Mr Sundareshan said Reliance has been asked to immediately stop natural gas sales to Essar Steel, Welspsun Maxteel, Ispat Industries and petrochemical and refineries so that full demand of core sectors of fertiliser and power is met.

“There is no question of any contractor not abiding by government instructions,” he said adding Reliance would abide by the ministry orders within days.

Of the 57.17 mmscmd of gas for which contracts have been signed, 9.57 mmscmd has been cornered by steel, petrochemical and refineries sector.

Essar Steel draws 3.2 mmscmd, Welspun Maxteel 0.40 mmscmd and Ispat 0.59 mmscmd. Besides, Reliance’s petrochemical plant gets 1.17 mmscmd and a sizeable 4.21 mmscmd goes to refineries including the Jamnagar units of Reliance.

Mr Sundareshan said the government had initially allocated 40 mmscmd of gas only to fertiliser, power, LPG extraction units and city gas distribution firms.

When output went up, additional users in steel, refineries and petrochemical sectors were added.

And now when the output has fallen to around 50 mmscmd, it is natural for the government to go back to allocation made to the priority sector, he added.

Oil regulator DGH has already sent a fact-finding mission to KG-D6 fields to ascertain reasons for the decline in production.

The three-member team lead by Gautam Sinha, head of production at DGH, will review well-wise production and reservoir performance of KG-D6 fields.

Reliance says output has dipped after touching 61.5 mmscmd achieved in March last year due to falling pressure at wells and that drilling more wells will not solve the problem as it will tap the same resource.

The regulator wants Reliance to drill 11 wells this fiscal, including two wells that were to be drilled last year.

Reliance holds 90% interest in the block KG-D6, where 18 gas and one oil discovery has been made. D1 and D3 gas and MA oil finds have so far been put into production. Niko has the remaining 10% in the block.

DGH has refused to approve investment budget for KG-D6 unless Reliance agrees to drilling the 11 committed wells even as the latter has projected that output from D1 and D3 fields will fall to 38 mmscmd from current 42 mmscmd in 2012-13.

As per the approved Field Development Plan (FDP), production in the block was to go up to 86.92 mmscmd in 2013-14 and decline in output is to set in from 2018-19. The field is expected to produce gas for a total of 13 years, i.e. till 2022.

D1 and D3 have seen output fall from 54 mmscmd achieved in March 2010 to 42-43 mmscmd at present. The MA oilfield in the same block is producing about 8 mmscmd of associated gas. Together, the current output from KG-D6 stands at 50 mmscmd.


2G scam: Emotional Karunanidhi backs Kanimozhi

The chief minister’s words came after the meeting, attended by his sons MK Alagiri and MK Stalin and grand nephew Dayanidhi Maran, which adopted a resolution on the 2G issue saying the party would face it legally

Chennai: Solidly backing his daughter Ms Kanimozhi, named in the Central Bureau of Investigation (CBI) charge-sheet in the second generation (2G) spectrum scam, an emotional DMK chief M Karunanidhi today said her growth in the party had nothing to do with the ‘daughter tag’ and only he was aware of what ‘she is going through now’, reports PTI.

“I view Ms Kanimozhi as a party worker. None should consider that she grew (in the party) just because she is my daughter,” the veteran politician told the DMK high-level committee meeting, convened to discuss the party’s strategy following ms Kanimozhi’s inclusion in the charge-sheet.

The chief minister’s words came after the meeting, attended by his sons Union minister MK Alagiri and deputy chief minister MK Stalin and grand nephew Dayanidhi Maran, adopted a resolution on the 2G issue, saying the party would face it legally, a DMK statement said.

“Today she was hesitant to come to this meeting since hundreds of media persons were waiting outside her residence to ask many questions. Therefore, I myself went and brought her here. I am not doing this to save my daughter but to save the party’s image,” the 87-year-old party patriarch said.

“Only I am aware of what Ms Kanimozhi, her mother (Ms Rajathi) and others in the house are going through. I haven’t been to the CIT Colony residence for the past three days,’ Mr Karunanidhi said.

He was explaining this to convey that he would not make an issue of his grievances and “pawn” the party in the process.

Recalling Ms Kanimozhi’s association with various social groups, he said she had organised recruitment drives across the state in coordination with district collectors, which has benefited 1.33 lakh persons.

“She works to serve. And that is why, with the intention of popularising folk arts, she had been organising Chennai Sangamam (cultural festival) in the city which has brought her so many laurels. Those who are jealous of this are opposing her,” he charged.

The CBI in its charge-sheet filed in a Delhi court had accused Ms Kanimozhi of entering into a criminal conspiracy with prime accused, former telecom minister A Raja, besides charging her under the Prevention of Corruption Act for taking illegal gratification through Kalaignar TV.




6 years ago

CBI without fear or favour should look to the role of MK also. The party is looting the national wealth in the name of poor. The whole family has amassed huge wealth and is leading super luxurious life, with the protection of Central leaders.

K B Patil

6 years ago

Yesterday, when the news channels were covering the party meeting, it looked more like a meeting of the Karunanidhi clan This man was elected by his voters to serve them. Instead of serving them, he is furthering the cause of his family. Such leaders are the best example of the decline in morality amongst our politicians. Mere imprisonment is too mild a punishment for our corrupt politicians.


6 years ago

It would be prudent if any lower level party worker of DMK would have got so much of media exposure and opportunities if she were not the daughter of Karunanidhi. Karuna conveniently overlooks the fact the schuduled 'Chennai Sangamam' has been differed due to the 2G scam connection with it. Radia tapes clearly establishes the Raja Kanimozhi connection. But for this connection Karunanidhi would not have bothered to camp inDelhi to demand for Raja's posting in Telecom industry overiding his grandnephew's efforts to get this ministry. Only with the hope of getting this ministry for the second time he had removed certain wordings in the rule. Unfortunately Kanimozhi overtook him to land the postings to her friend Raja. In fact a more virulent and active CBI would have arrested the whole family of Karunanidhi. Thanks to supreme court we some action unlike in Bofors.

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