RBI panel for 30yr fixed rate loans,reasonable prepayment fine

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

On deposits front, it recommended banks should popularise the fixed deposit schemes with tenure of above 5 years as the same are eligible for tax exemption.

This would to some extent meet long-term funding needs of banks, the commiittee headed by K K Vohra, RBI Chief General Manager for internal debt management department, said.

"The Indian financial system has G-Secs upto 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 upto 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.

On the pre-payment penalty issue, it said: "... The pre-payment 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, the panel said. In addition, banks may explore promoting securitisation market for better asset liability management, the report of the 'committee to assess the feasibility of introducing more long-term fixed rate loan products by banks' added.