Fixed rates are better for long-term loans: RBI deputy governor Anand Sinha

MUMBAI: The Reserve Bank of India has made a case for fixed lending rates for longterm loans. “Any long-term product, if it is on a fixed-rate basis, is better from an interest rate-risk perspective,” said Reserve Bank of India deputy governor, Anand Sinha while speaking on the sidelines of a bankers’ conference in Chennai on Sunday.

“When you are going for fixed rate, you are taking a view that you are insulating from the interest-rate risk,” he added.

Besides, delivering the valedictory address at the annual Bancon organised by the Indian Overseas Bank, Sinha explained that like unhedged foreign exchange exposure by corporate has the potential of creating credit risk, there are similar risks in longterm floating rate products.

At present, among long-term loans, a bulk of the home loans and many loans to infrastructure projects are on a floating rate basis. As of end September, these two segments together accounted for around 24.5% of the total non-food credit by banks.

Among other things he warned banks to reduce their reliance on wholesale funding and market borrowings as it could add to the systemic risk.

He also said that while non-performing loans are rising, they are still not a systemic risk. Moreover, loan slippages are rising, which calls for banks to focus more on recoveries.

Among other issues, Sinha also said that there should be consolidation in the banking sector as the country need larger-sized banks that are very simple in their structure. However, he did not spell out what could be the optimum size of such banks.