Report of the Committee to Assess the Feasibility of introducing more Long-Term Fixed Interest Rate Loan Products by Banks

The Reserve Bank of India has today placed on its website the report of the Committee to Assess the Feasibility of Introducing more Long-Term Fixed Rate Loan Products by Banks.

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Some of the important recommendations made by the Committee are:

  • The banks which have not issued long-term bonds (minimum maturity of 5 years) to the extent of their exposure to the infrastructure sector (minimum residual maturity of 5 years) could utilize the room available to issue more Long Term bonds which would help release resources for extending long-term fixed rate loan products.
  • Banks should popularize the Fixed Dposit schemes with tenors of above 5 years as the same are eligible for tax exemption. This would to some extent meet the long-term funding requirement of banks.
  • The Indian financial system has G-Secs upto 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 upto 30 years which would help reduce the EMIs of the borrowers.
  • Large institutional investors like Pension Funds, Provident Funds, Insurance Companies, etc. should be encouraged to invest in bonds issued by banks.
  • 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. However, banks should take care that the resetting of interest rate does not violate regulatory guidelines on base rate.
  • Banks may explore the option of take-out financing. In addition, banks may explore promoting securitization market for better asset liability management.
  • Banks should charge pre-payment penalty on fixed rate loan products on the outstanding amount only. Further, penalty should be reasonable so that it does not act as a disincentive for the fixed rate loan borrowers.
  • Banks and Indian Banks Association should play a prominent role in educating customers regarding possible impact of rate changes on their equated monthly instalments.

RBI would examine and initiate appropriate action on the recommendations made by the Committee.

It may be recalled that in terms of the announcement made in the Annual Policy Statement for the Year 2012-13 (para 104), a Committee comprising officials from commercial banks, Reserve Bank and other stakeholders was constituted under the Chairmanship of Shri K.K. Vohra, CGM, Internal Debt Management Department, Reserve Bank of India. Other members of the Committee were Shri Sangeet Shukla (Senior Adviser, IBA), Shri Vivek Mhatre (GM, Union Bank of India), Shri M.S. Sastry (CGM, SBI), Shri V.H. Thatte (GM, BOB), Shri Prashant Ranjit (Regional Head, Standard Chartered Bank), Shri Vasudeva Konda (Joint GM, ICICI Bank), Smt. Theresa Karunakaran (GM, RBI), Shri Vivek Deep (GM, RBI), Shri D.G. Kale (GM, RBI), Shri Rakesh Tripathy (DGM, RBI) and Shri Vivek Aggarwal (Member Secretary and GM, RBI). The draft report of the Committee was placed on RBI website on November 09, 2012 for public comments. Taking into account the feedback received from the market participants and other stakeholders, the Committee has now finalised its report.

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