RBI panel favours 30 year fixed rate loans

RBI panel favours 30 year fixed rate loans Mumbai: Seeking to encourage housing activity, an RBI committee has pitched for introduction of fixed rate loans for up to 30 years and also asked banks to explore the possibility of levying "reasonable" pre-payment penalty on the outstanding amount only.

The banks, the RBI report said, should also look at introducing fixed rate long-term loan with an option of resetting interest rates after every 7 to 10 years. This could be in addition to plain vanilla fixed rate loan products.

The report has also recommended that the banks popularise the fixed deposit schemes with tenure of above five years, which are eligible for tax exemption.

"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," it said.

At present, long-term credit, including home loans, are offered for a period of up to 25 years.

These initiatives would help in meeting long-term funding needs of banks, the committee headed by RBI Chief General Manager K K Vohra said.

On the pre-payment penalty issue, it said: "The penalty should be levied only on the outstanding amount on the date of pre-payment and not on the loan amount initially sanctioned. Further, the pre-payment penalty should be reasonable so that it does not act as a disincentive for the fixed rate loan borrowers."

Moreover, the pre-payment penalty could be graded based on the period after which the loan is repaid, i.E. After 5 years, 10 years or so, it added.

The RBI panel also said large institutional investors like pension funds, provident funds, insurance companies should be encouraged to invest in bonds issued by banks.

Banks may explore the option of take-out financing, in addition to promoting securitisation for better asset liability management, the report said.

PTI