Reserve Bank of India appears to favour long-term loan products on fixed interest rates, believing it will help banks reduce credit risks and prevent significant deterioration in asset quality.
“Any long-term product, if it is on a fixed-rate basis, is better from the interest rate risk perspective,” the central bank’s deputy governor, Anand Sinha said on Sunday. “Otherwise, what happens is if interest rates are changing, you don’t know what will happen in the future,” he told reporters here on the sidelines of Bancon 2011.
Sinha explained that long-term loans on floating rates carry a risk similar to un-hedged foreign exchange exposure of companies. “When you are going for a fixed-rate product, you are taking a view that you are insulating yourself from interest-rate risks. Floating rates on very long-term products can lead to credit risks,” he said.
Currently, a majority of banks’ long-term retail loan products like housing loans are on floating rate of interest.
So, is the banking regulator planning to introduce guidelines on managing interest-rate risks on long-term loans? “We will see about it,” is all what Sinha would say.
Separately, he said there was a need for banks to reduce their dependence on wholesale funding and market borrowing — for, it may add to the systemic risks. “If you have too much wholesale funding and you are looking to renew it...if you get into a difficult situation, then you will not find a replacement for that,” he said.
“Now if you don’t get fresh funding, then what are your options? You have to go for fire sale of assets and book a loss. Not only you suffer, but you put the whole system at a loss,” he added.
However, he clarified that currently there were no signs of systemic risks on banks’ asset quality. “Slippages are increasing. It is higher than recovery. Credit management needs to be geared up; more efforts needed for arresting slippages,” he said. “But I don’t see any systemic issue building up as of now.”
