‘Prepaying these loans early will entail additional cost’
The exact contours of SBI’S proposed home loan product are not known. The last time SBI had a structure like that, it was the (in)famous teaser rate loan regime of 2010-2011, where it offered attractively low fixed rates for the first two-three years and then a vague floating rate after the initial fixed-rate period got over. In fact, somebody who took a ~30 lakh home loan in the teaser rate regime in June 2010 is currently paying through his nose an interest rate of 11.30 per cent per annum. Clearly, whoever else benefitted from the teaser rate loans, it was not the borrower.
Remember that if a khichdi loan is prepaid during the time when the fixed-rate option is still applicable, then the RBI’S stipulation of no prepayment charges does not apply. All in all, a khichdi loan is like the proverbial chakravyuh – you can enter it but the cost of exit is high.
There are two significant issues surrounding such khichdi loans. First, the RBI is unlikely to approve low fixed rates for the initial years (a la teaser rate loans), which means that the initial fixed rates are likely to be close to market rates. In an environment where interest rates look likely to go down rather than up, that would be a terrible deal for borrowers, especially since prepayment may also entail prepayment charges. Second, if such a loan is approved by the RBI, then SBI may undersell its regular floating-rate home loan product (just like it undersold the short-lived repo rate linked loan rate or RLLR product), with the result that a large number of home loan borrowers may be saddled with a burdensome high-rate loan. If approved, such a strategy would allow the bank to neatly sidestep the RBI’S need for monetary transmission. Given the lack of consumer protection legislation in India, any complicated product just cannot be customer friendly. Hopefully the RBI will understand this .