RBI for periodic interest reset on long-term fixed-rate loans

The Reserve Bank today suggested banks reset interest on fixed-rate long-term loans instead of charging a fixed rate throughout the tenure as it will be costlier for borrowers than floating rate loans.

If implemented, the move will not only help borrowers who currently end up paying more, but will also help bank balance their assets and liabilities, the RBI said, adding banks could reset interest rates after 7-10 years.

"Till a few years back, a majority of loans offered by banks and financial institutions used to be in the nature of fixed-rate loans. However, in recent times retail loan portfolio has become skewed in favour of floating rate products," it said in a report prepared by a committee which assessed feasibility of introducing more long-term fixed rate loan products.

The committee was set up in 2012 under chairmanship of K K Vohra, RBI Chief General Manager for internal debt management department. The draft report of the panel was submitted on November 9, 2012.

The RBI report called on banks to raise long-term bonds to finance their long-term fixed-rate loans to avoid asset-liability mismatch.

"Fixed rate long-term loan products with periodic interest reset provision (say every 7-10 years) may be offered by banks in addition to the plain vanilla fixed rate loans.

"However, banks should take care that resetting of interest rate does not violate regulatory guidelines on base rate," the RBI said, adding banks can offer fixed-rate loans of up to 30 years to reduce the burden of EMIs on borrowers.

Noting that the domestic financial system has G-Secs up to 30 years, the report said lenders 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.