Go for low EMI, long term: RBI to banks

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SummaryFor home loans, banks should charge lower EMIs and increase repayment period: RBI

Banks should look at the possibility of introducing home loans with lower EMIs and higher repayment period of up to 30 years, suggested an RBI report.

The RBI draft report on home loans has also suggested that banks should introduce and popularise long-term fixed rate home loan with a provision of re-fixing the interest rate after period of 7-10 years.

These suggestions form a part of a report, 'Feasibility of Introducing More Long-Term Fixed Interest Rate Loan Products by banks. RBI has invited comments from the public on the report by November 23.

At present, banks give home loans with a maximum tenure of 15-20 years only.

The report also suggested that banks should popularise fixed deposit schemes for periods of over five years as it would help them procure long-term funds.

The banks, the report added, may also raise funds by floating 30-year bonds on the line of government securities.

The report said "transparency in retail loan products should be appropriately addressed and the customers be educated by lending institutions on the possible impact of rate changes on EMIs to enable borrowers to have better planning with regard to their repayments".

During 1977-2000, fixed rate loan products were popular. However, post 2000, these products gave place to floating rate loans mainly due to falling interest rates in the early 2000s and significantly higher interest rate on fixed rate loan products in many cases.

The encouragement to fixed rate home loan, it added, is necessary as "customers are not able to understand the intricacies of economic cycles, changes in policy rates, transmission of the same and the consequential sudden increase in equated monthly instalments (EMIs) therby exposing themselves to interest rate risk".

On the issue of pre-payment penalty, the report recommended that it should be levied only on the outstanding amount on the date of pre-payment and not on the loan amount initially sanctioned.

It also recommended that large institutional investors like pension funds, provident funds, insurance companies, should be encouraged to invest in bonds issued by banks.

The draft said, if necessary, suitable amendments to relevant investment guidelines could be made.

"These institutional investors are ideal match for developing long-term retail mortgage market in India," the report added.

It further suggested that the housing loan regulator NHB may examine the feasibility of extending its refinancing scheme to banks offering long term fixed housing loan products to their customers other than low income households.

"Further, NHB may explore issuing long term housing bonds for channelising the long term resources into the housing sector," the draft said.

The report also noted that lack of liquidity in the Indian securitization market is one of the major factors responsible for lack of popularity for fixed rate loan products.

It also pointed out that substantial increase in EMIs over a period of time has an adverse impact on the repayment capacity of the borrowers which also results in loan

delinquencies.

"In view of this, the aspect of transparency in retail loan products needs significant improvement...," it said.

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