RBI asks banks to encourage fixed rate long-term loan products
RBI has come up with draft guidelines to popularise fixed-rate home
loans. The guidelines ask banks to encourage fixed rate long-term loan
products with rate reset at 7-10 years.
Do your home loan instalments go up each time the Reserve Bank of India (RBI) increases the rate at which banks borrow from it?
You could get respite from this uncertainty as the RBI has come up with draft guidelines to popularise fixed-rate home loans. The guidelines ask banks to encourage fixed rate long-term loan products with rate reset at 7-10 years. The RBI also allows banks to offer hybrid loan products - having both fixed and floating interest rate features with a higher proportion of fixed-rate loan.
As interest rates for fixed-rate loans are at a premium over the market rates, the RBI has said that interest rate on such loans "should not charge offmarket rates".
The guidelines allow banks to charge pre-payment penalty on such loans, but only on the outstanding amount. It says that the pre-payment penalty "should be reasonable" and proposes that the penalty be graded based on the period after which the loan is repaid.
"The key challenge is to find sources of funds that are truly long-term in nature. Or finding appropriate hedging mechanisms to hedge the risks," says Jairam Sridharan, head, consumer lending and payments, Axis Bank. RBI guidelines suggest that banks to issue long-term debt papers and encourage demand for such papers among institutions. It also exhorts banks to popularise fixed deposits with five or more years maturity.
You could get respite from this uncertainty as the RBI has come up with draft guidelines to popularise fixed-rate home loans. The guidelines ask banks to encourage fixed rate long-term loan products with rate reset at 7-10 years. The RBI also allows banks to offer hybrid loan products - having both fixed and floating interest rate features with a higher proportion of fixed-rate loan.
As interest rates for fixed-rate loans are at a premium over the market rates, the RBI has said that interest rate on such loans "should not charge offmarket rates".
The guidelines allow banks to charge pre-payment penalty on such loans, but only on the outstanding amount. It says that the pre-payment penalty "should be reasonable" and proposes that the penalty be graded based on the period after which the loan is repaid.
"The key challenge is to find sources of funds that are truly long-term in nature. Or finding appropriate hedging mechanisms to hedge the risks," says Jairam Sridharan, head, consumer lending and payments, Axis Bank. RBI guidelines suggest that banks to issue long-term debt papers and encourage demand for such papers among institutions. It also exhorts banks to popularise fixed deposits with five or more years maturity.
