Home loan borrowers who have opted for fixed rates may have easier terms on their mortgages as the Reserve Bank of India has advised banks to revise the penalty structure on prepayments and charge it only on the outstanding amount. It has also recommended that banks should focus on raising long-term deposits to fund more long-term loans to help reduce the EMI burden on home loan borrowers. 

A report on the 'Feasibility of Introducing more Long-Term Fixed Rate Loan Products by Banks' from the banking regulator has said banks should charge pre-payment penalty only on the outstanding loan amount and not on the value of loans as is normally done. The guideline will help borrowers save substantial amounts if they were to prepay a fixedrate loan. This comes after the RBI's recent mandate to banks to do away with pre-payment penalty on floating rate home loans. 

The RBI committee that prepared the report has also advised banks to popularise longterm deposits to develop a longterm fixed rate product. The committee notes that the Indian financial system has government bonds for up to 30 years. This creates a benchmark to issue and price 30-year bonds by banks. Banks could, therefore, make efforts to offer longer-tenor fixed rate loans, say up to 30 years, which would help reduce the EMIs of borrowers. Fixed-rate long-term loan products with periodic interest reset provision (say every 7-10 years) may be offered by banks in addition to plain vanilla fixed-rate loan products. 

However, banks should take care that the resetting of interest rate does not violate regulatory guidelines on the base rate, the report said. Banks may explore the option of take-out financing. 

In addition , banks may explore promoting securitisation market for better asset-liability management. The committee has also suggested that banks and Indian Banks Association should play a prominent role in educating customers regarding possible impact of rate changes on their equated monthly instalments. (Economic Times)