This practice raised concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It was also observed that many banks, at the time of initial loan appraisal, were not taking into account the repaying capacity of the borrower at normal lending rates.
Therefore, in view of the higher risk associated with such loans, the standard asset provisioning on the outstanding amount had been increased from 0.40 per cent to 2.00 per cent with effect from December 23, 2010.