Banks may explore the option of raising resources through long-term (LT) bonds to enable them to extend LT fixed rate loan products, said a central bank panel.

The RBI’s ‘Committee to Assess the Feasibility of Introducing More Long-Term Fixed Interest Rate Loan Products by Banks’, recommended offering of fixed rate LT loan products with periodic interest reset provision (say every 7-10 years).

Other recommendations of the committee include popularising fixed deposit schemes with tenor of 5 years and above as the same are eligible for tax exemption, allowing banks to issue LT bonds for their exposure to housing loans qualifying for priority sector.

Further, the committee wants take-out financing in case of housing loans and encouraging large institutional investors such as pension funds, provident funds, insurance companies, etc. to invest in bonds floated by banks.

The committee strongly feels that the aspect of transparency in retail loan products should be appropriately addressed and the customers be educated by the lending institutions on the possible impact of rate changes on their equated monthly instalment (EMI) to enable borrowers to have better planning with regard to their repayments.

It said, at times, the customers taking floating rate loans are not able to understand the intricacies of economic cycles, changes in policy rates, transmission of the same and the consequential sudden increase in EMIs thereby exposing themselves to interest rate risk.

On the other hand, banks and financial institutions offering floating rate loans have got the expertise to manage the inherent interest rate risk and take a view on future rate movements.

(This article was published on November 12, 2012)
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