RBI panel suggests banks to encourage long-tenor FD schemes

A Reserve Bank of India (RBI) committee which studied the feasibility of introducing more long-term fixed rate loan products by banks, made following suggestions:

  • Banks should popularize Fixed Deposit (FD) schemes with tenors of above 5 years as they are eligible for tax exemption. It would help banks in meeting their long-term funding requirements.
  • Besides plain vanilla fixed rate loan products, banks can offer fixed rate long-term loan products with periodic interest reset provision (say every 7-10 years). However, the resetting of interest rate should be in line with the regulatory guidelines on base rate.
  • Banks which have not fully exploited the sector of long-term bonds (minimum maturity of five years) to the infrastructure sector (minimum residual maturity of five years) could make use of the room available to issue more long-term bonds which would aid release resources for extending long-term fixed rate loan products.
  • Banks can consider offering longer-tenor fixed rate loans, say up to 30 years, which would help reduce the EMIs of borrowers.
  • Banks can also workout the option of take-out financing and can also explore promoting securitization market for better asset liability management.
  • Banks should charge pre-payment penalty on fixed rate loan products on the outstanding amount only.



Latest E-Books