A Reserve Bank of India (RBI) panel has suggested that banks should popularise fixed deposit schemes with tenors of above five years as they are eligible for tax exemption.
“This would, to some extent, meet the long-term funding requirement of banks,” the committee said. The RBI released the report of the committee which studied the feasibility of introducing more long-term fixed rate loan products by banks on Tuesday.
The panel felt that the fixed rate long-term loan products with periodic interest reset provision (say every 7-10 years) couldbe offered by banks in addition to plain vanilla fixed rate loan products. However, the committee felt, “banks should take care that the resetting of interest rate does not violate regulatory guidelines on base rate.”
Banks which have not issued long-term bonds (minimum maturity of five years) to the extent of their exposure to the infrastructure sector (minimum residual maturity of five years) could utilise the room available to issue more long-term bonds which would help release resources for extending long-term fixed rate loan products, the panel said.
Banks could make efforts to offer longer-tenor fixed rate loans, say up to 30 years, which would help reduce the EMIs of borrowers.
Banks also were asked to explore the option of take-out financing. In addition, banks could explore promoting securitisation market for better asset liability management.
The central bank panel said that banks should charge pre-payment penalty on fixed rate loan products on the outstanding amount only.