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ICICI Bank will now offer loans that give a choice of fixed rate for either one or two years, at differential rates for various slabs. The bank has come out with these teaser rates as its loan portfolio has shrunk compared to other banks.

Under the one-year fixed rate plan, a customer will pay 10.50% for a Rs 25-lakh loan, 11% for loans up to Rs 75 lakh and 11.50% for higher loans. From the second year, the rate will be linked to ICICI's base rate. Under the two-year offer, the rate will be 10.75% for loans up to Rs 25 lakh, 11.25% for up to RS 75 lakh and 11.75% for higher loans. This is similar to teaser rates that forced a regulatory intervention last year. The rate climbs when it becomes a floater after the first couple of years and is linked to the benchmark rate.

Although banks claimed it benefited customers, the RBI said it misleads the customers because some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate in the initial years, becomes effective. In October 2010, the RBI had raised the standard provisioning requirement for teaser loans five-fold, to 2%, to discourage banks from offering such schemes. ICICI Bank claims the two offerings were not teaser schemes since the rates are higher than market rates. That seems dubious because most people with existing loans under floating scheme are paying EMIs with around 12% interest rate.

Other Banks are likely to follow suit. However, we do not recommend getting into fixed home loans right now. RBI may increase the rate by another 25 basis point but after that the interest rates should come down. An investor may get stuck with a high fixed rate loan for 2 years when the interest rates are expected to come down.

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