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RBI's Committee recommends promoting fixed rate long term loan products

 

Home > Securitization > News on Securitization > Securitization in India > RBI's Committee recommends promoting fixed rate long term loan products

 

January 28, 2013:

RBI vide press release dated 22nd January, 2013[1] placed the report of theCommittee to Assess the Feasibility of Introducing more Long-term Fixed Rate Loan[2]("Report") products by banks. This report suggests the introduction of long term fixed rate loan products which will be useful both to the banks and their customers. The objective is to reduce the burden of cost to customers with respect to house loans by introducing fixed rate long term loans and to implement pre-payment penalty on the outstanding amount of the loan instead of the entire loan value. Moreover, long tenure loans by banks will reduce the EMI burden of the customer.

The Committee finalizes the draft report[3] which was published by the RBI on November 9, 2012. With reference to the Report submitted by the Committee; some of the important recommendations of the Report are as below:

  • Banks to introduce long term fixed rate loan product with interest re-set provisions between 7-10 years till the maturity of the product. The interest re-set to have a cap and floor defined to protect the borrowers and banks from risk arising out of adverse movement of interest rates.
  • Banks to explore the option of raising resources through issuance of long term bonds to the extent of their exposure to the infrastructure sector (minimum residual maturity of 5 years).
  • The Indian financial system has G-secs upto 30 years and can be used as a benchmark to price 30 year bonds by banks. Therefore banks to offer longer tenor fixed rate loans.
  • Large institutional investors like pension funds, provident funds, insurance companies to be encouraged to invest in long term bonds. Banks should also popularize fixed deposit schemes with tenor of above 5 years as these are eligible for tax exemption as well.
  • NHB may issue long term bonds and also extend refinancing schemes to banks offering fixed rate long term housing loans.
  • Banks to explore options of take-out financing, securitisation for better ALM management
  • Banks to charge pre-payment penalty on fixed rate loan products on the outstanding amount only.

 


 

 [Reported by: Anushree Chatterjee]

 
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