RBI wants banks to lower EMIs on home loans

Domestic banks should look at the possibility of introducing home loans with lower EMIs and higher repayment period of up to 30 years, the Reserve Bank of India (RBI) has said in a draft report.

The RBI draft report is meant to assess the feasibility of introducing more long-term fixed interest rate loan products by banks in the country. The apex bank has invited comments from the public on the report by November 23.

It also suggested that banks introduce and popularise long-term fixed rate home loans with a provision of refixing the interest rate after 7-10 years, in addition to the plain vanilla fixed rate loan product of long tenor.

At the time of reset, there could be an option for the lender to fix a reasonable cap and floor (say 200 or 300 basis points) in relation to the interest rate originally charged to the borrower at the time of reset to protect the customers from very high interest cost.

Currently, banks give home loans with a maximum tenure of 15-20 years only.
Apart from popularising fixed deposit schemes for periods of over five years, the report suggested that banks may also raise funds by floating 30-year bonds on the line of government securities.

“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,” it said.

During 1977-2000, fixed rate loan products were popular. However, post 2000, those products paved way for 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.

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