According to Governor Shaktikanta Das, borrowers tend to turn to fixed rate loans even as the Reserve Bank of India (RBI) moves towards liquidity rebalancing.
âI think most banks have so far given loans at floating interest rates. Now there is a tendency for people to turn to fixed rate loans, âDas said in response to a question from State Bank of India (SBI) Chairman Dinesh Kumar Khara at the SBI Banking and Economics Conclave.
In asking banks to be ready to invest when the investment cycle resumes, the governor stressed that granting loans at variable or fixed interest rates is a business judgment of banks, and the RBI generally does not like not enter these areas.
âRegardless of the fact that there is excess liquidity, I believe that the pricing of the risk of the various loans granted by the banks must be carried out diligently by them.
âThe mere fact that there is excess liquidity should not lead to poor loan valuation as this excess liquidity will not be a permanent feature,â Das said.
The governor observed that the RBI began to take a closer look at the business models and strategies of banks. In their drive to grow, banks must avoid the herd mentality and seek differentiated business strategies, he added.
ââ¦ Make your business decisions, we won’t interfere. But we’ll see what kinds of vulnerabilities or risks build up and our first priority would be to warn the banks themselves.
ââ¦ So that’s what I was referring to – that we’re also looking at business models now. As banks make their business decisions, I think they should take into account the amount of liquidity available and the type of interest rate structures they offer, âDas said.
Regarding interest rates – the amount of interest rates and the structure of interest rates (variable or fixed) on loans – the governor considered it a business decision, which the banks should take on the basis of prudent principles.
The governor stressed that there will always be sufficient liquidity to meet the needs of the productive sectors of the economy.
âBut slowly, we want to rebalance the economy so that banks have the liquidity they need and not the excess. This has been our approach in managing liquidity,â he said. .
Khara, in his question, referred to the tendency of some industries to seek fixed interest rate loans and the unavailability of any kind of interest hedging instruments at the moment.
The SBI chief also hinted at the challenge of poor loan pricing amid excess liquidity and bankers’ anxiety to increase their portfolios.
Calling attention to the variable repo rate, reaching almost 4 percent, the SBI chief said companies seemed to be reading it as a first indication of the interest rate scenario emerging in the days to come.
âAnd invariably, it is said that the necessary liquidity is not available. So when the investment arrives, it might be at a very high interest rate. This is one of the concerns that many companies have in mind, âKhara noted.