RBI panel for flexible rate on long-term loans

Jan 23 2013, 00:46 IST
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SummaryThis would to some extent meet the long-term funding requirement of banks, the panel said.

A Reserve Bank of India committee on Tuesday proposed that banks should be allowed to reset interest on long-term loans instead of charging a fixed rate throughout the tenure. It has also argued in favour of 30-year loans to bring down the EMIs of borrowers.

“Fixed rate, long-term loan products with periodic interest reset provision (say every 7-10 years) may be offered by banks in addition to plain vanilla fixed rate loan products,” the report said.

Banks should popularise the fixed deposit schemes with tenor of above five years as the same are eligible for tax exemption. This would to some extent meet the long-term funding requirement of banks, the panel said.

As the Indian financial system has G-Secs up to 30 years, a benchmark to issue and price 30 year bonds by banks, banks could, therefore, make efforts to offer longer-tenor fixed rate loans, say up to 30 years which would help reduce the EMIs of the borrowers, the panel said. Large institutional investors such as pension funds, provident funds, insurance companies should be encouraged to invest in bonds issued by banks, it said.

The panel said the banks which have not issued long-term bonds to the extent of their exposure to the infrastructure sector could utilise the room available to issue more long-term bonds which would help release resources for extending long-term fixed rate loans.

In addition, banks may explore promoting securitisation market for better asset-liability management.

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