The finance ministry and the Reserve Bank of India want banks to wind up "teaser rates" - very low interest rates offered for a limited introductory period to attract new borrowers.
Both feel the practice can create large number of bad loans as "borrowers with low financial means" can be enticed by the low interest offerings to take money beyond their repayment capacity, according to a report in The Telegraph.
The US mortgage crisis was triggered by indiscriminate bank lending to homebuyers with low financial ability who were unable to pay back their loans. "The worry is that people may borrow because the rate offered is low and may default once lending rates start rising," the paper quoted unnamed senior officials as saying.
Banks start charging higher interests once the initial teaser rate period is over. With rates stiffening in the near and medium term, the actual interest rates may go up beyond what many borrowers have calculated, the officials said.
Many banks had offered teaser rates of 8-8.5 per cent compared with market rates of 10-14 per cent.
RBI deputy governor Usha Thorat had earlier expressed fears on teaser rates. "In 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," Thorat had said.
The finance ministry feels that with the economy picking up such schemes should be shunned as "they are risky and somewhat akin to what the US banks have done through the 1990s and this decade", the report said.