Banks must popularise long-term deposits, says RBI working group

Jan 23 2013, 02:12 IST
Comments 0
SummaryA working group of the Reserve Bank of India has suggested that banks must popularise long-term deposit schemes having tenure of over 5-year and raise funds through long-term bonds in order to increase disbursals of fixed rate long-term loans.

A working group of the Reserve Bank of India has suggested that banks must popularise long-term deposit schemes having tenure of over 5-year and raise funds through long-term bonds in order to increase disbursals of fixed rate long-term loans.

The group, formed to study the feasibility of long-term fixed rate loan products, said floating rate loans put pressure on customers during a rising interest rate cycle as equated monthly instalments go up.

Fixed-rate loan products that have periodic resets in interest rates can be given by banks to keep EMIs of customers steady.

“Banks, however, should take care that the resetting of interest rate does not violate regulatory guidelines on base rate,” the report said. For such fixed rate loans, banks must charge pre-payment penalty only on the outstanding amount and not the sanctioned amount, the report said.

The report noted that off late the growth in floating rate loans has been larger than fixed rate loans. Fixed rate loans now form only 25% of total loans, down from around 32% in 2010, according to the report.

Given that bank deposits are predominantly short-term in nature, sanctioning long-term fixed rate loans will create an asset-liability mismatch, the group noted.

For instance, data from the RBI show that deposits of up to one-year totalled about Rs 32 lakh crore in 2011-12 against just Rs 10 lakh crore in the above 5-year category.

Therefore, banks must popularise deposits with tenure of over five-year and also raise funds through long-term bonds. The group recommended that large institutional investors such as provident funds and insurance companies must be encouraged to invest in long-term bonds issued by banks.

Further, banks must also invest in long-term government bonds having a tenure of 30-year as well.

Banks can also explore the option of take-out financing and securitisation to garner long-term funds.

Ads by Google

More from Back Page

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...