An expert panel suggested Reserve Bank of India (RBI) to allow banks to issue long-term bonds which carry fixed interest rate in order to mop up resources for lending to infrastructure sector.
The panel headed by KK Vohra, Chief General Manager, internal debt management department, RBI, suggested that banks can issue long term bonds with minimum tenure of five years but subject to their credit exposure in the infrastructure sector with the minimum residual maturity of five years.
The suggestion, if implemented, would benefit banks which have not issued long-term bonds to the extent of their exposure to the infrastructure sector. These banks could utilize the room available to issue more Long Term bonds which would help release resources for extending long-term fixed rate loan products, said the panel report.
The committee was formed to assess the feasibility of introducing more long-term fixed interest rate loan products by banks.
In between 1977 and 2000, those products were popular and banks used to offer those to their customers. However, interest rates had started falling down 2000 onwards. Hence, floating rate loan products came to the fore replacing all major fixed rate products.
The committee also recommended including a “reset of interest clause” in long term bonds every 7-10 years by the issuing bank.
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