Fixed rate products will insulate banks' loan portfolio

The Deputy Governor, Reserve Bank of India, Mr Anand Sinha on Sunday said it is better that banks introduce more long-term fixed interest rate products to insulate themselves against credit risk.

This comment comes in the context of banks' lending rates jumping from 8 per cent to 10.75 per cent in the last 17 months and concerns emerging about the ability of borrowers, especially home loan borrowers, to service loans taken on floating rates.

“Any long-term loan product, if it is on a fixed interest rate basis, it is better from the interest rate risk perspective,” said Mr Sinha on the sidelines of the Bankers' conference.

Most of the home loans carry floating interest rate. Given that lending rates have gone up sharply, banks face the danger of borrowers falling behind on loan servicing and the loans turning into non-performing assets. The Deputy Governor stated that non-performing assets in the banking system were not a concern.

He added that fixed rate loans will insulate banks' loan portfolio as well as borrowers from the vagaries of sharp, uncertain interest rate movements.

Wholesale funding

Mr Sinha warned banks about their dependence on wholesale funding as it could have systemic implications. In a tight liquidity situation, when funding dries up, banks could be forced to resort to distress sale of assets. This, in turn, could affect the valuation of such assets held by other banks.