RBI backs fixed rate loans, focuses on long term bonds

Moneycontrol Bureau

Banks can issue long term bonds with minimum tenure of five years but subject to their credit exposure in the infrastructure sector with the minimum residual maturity of five years, suggested a panel, headed by K.K. Vohra, chief general manager, internal debt management department, Reserve Bank of India (RBI); advocating the need for long term fixed interest rate loans.

The committee was formed to assess the feasibility of introducing more long-term fixed interest rate loan products by banks. In between 1977 and 2000, those products were popular and banks used to offer those to their customers. However, interest rates had started falling down 2000 onwards. Hence, floating rate loan products came to the fore replacing all major fixed rate products.

"The banks which have not issued long-term bonds to the extent of their exposure to the infrastructure sector could utilize the room available to issue more Long Term bonds which would help release resources for extending long-term fixed rate loan products," said the panel report released on Tuesday.

The committee also recommended including a "reset of interest clause" in long term bonds every 7-10 years by the issuing bank. However, banks should take care that the resetting of interest rate does not violate regulatory guidelines on base rate, it cautioned adding that lenders should charge pre-payment penalty on fixed rate loan products on the outstanding amount only.

Currently, most banks are averse to offering long term fixed interest loans as it will result in huge asset liability mismatches. Banks mostly raise funds through short term deposits (1-3 years). Fixed deposits schemes with five year or more maturity period are not popular.

"Banks should popularize the fixed deposit schemes with tenors of above 5 years as the same are eligible for tax exemption. This would to some extent meet the long-term funding requirement of banks," the committee recommended.

"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."

Banks issuing the proposed bonds to raise long term money, according to the panel, can find subscription from large institutional investors like pension funds, provident funds, and insurance companies. These institutions too require long term money.

Vora committee also suggested of exploring securitization market for better asset liability management.

India Ratings, the domestic arm of global rating agency Fitch on Tuesday hinted at the growing problem of asset liability mismatches.

"Asset-liability mismatches up to one year are at all time high levels and for a few banks, even higher than their stock of government securities. The risk is partly mitigated by banks’ solid domestic retail depositor base, but the high pace of refinancing squeezes quarter-end liquidity, keeps funding cost elevated," Ananda Bhoumik, senior director - financial institutions, India Ratings said in a report.

saikat.das@network18online.com