There is a trend among borrowers to move towards fixed rate loans even as the Reserve Bank of India (RBI) moves towards rebalancing liquidity, according to Governor Shaktikanta Das.

“I think most of the banks till now have been giving floating interest rate loans. Now, there is a trend of people are moving towards fixed rate loans,” said Das in reply to a question posed by State Bank of India (SBI) Chairman Dinesh Kumar Khara at the SBI Banking and Economics Conclave

Asking banks to be investment-ready when the investment cycle picks up, the Governor emphasised that giving loans at floating or fixed interest rate is a commercial judgment of banks, and typically the RBI does not like to enter into those areas.

“Irrespective of the fact that the liquidity is in surplus, I think risk pricing of the various loans being extended by the banks has to be done diligently by them.

“The mere fact that there is excessive liquidity should not lead to any mispricing of loans because this excessive liquidity is not going to be a permanent feature,” said Das.

Business models

The Governor observed that the RBI has started taking a closer look at the business models and strategies of banks. In their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies, he added.

“.…Take your commercial decisions, we will not interfere. But we will see what kind of vulnerabilities or risks are building up and our first priority would be to caution the banks themselves.

“...So, therefore, that is what I was alluding to – that we are looking at business models also now. While banks take their commercial decisions, I think they should factor in how much of liquidity is available and what kind of interest rate structures they are providing,” said Das.

On the interest rates – the quantum of interest rates and the structure of interest rates (floating or fixed) on loans – the Governor opined that it is a commercial decision, which banks should take based on prudent principles.

The Governor underscored that there will be always adequate liquidity to meet the requirements of the productive sectors of the economy.

“But slowly we want to rebalance the economy in a manner that banks are left with that much liquidity which they need and not excess. This has been our approach in the liquidity management,” he said.

Khara, in his question, referred to the trend of some sectors reaching out for fixed interest rate loans and non-availability of any kind of interest hedging instruments as of now.

The SBI chief also alluded to the challenge of mis-pricing of loans amid excess liquidity and the anxiety on the part of bankers to grow their book.

Calling attention to the Variable Reverse Repo Rate almost reaching 4 per cent, the SBI chief said corporates seem to read it as an early indication of the emerging interest rate scenario in the days to come.

“And invariably, it is said that liquidity when required is not available. So, when the investment will come in, perhaps it will be at a very high interest rate. This is one of the concerns which many of the corporates have in mind,” remarked Khara.