Banks offer semi-fixed loans to deploy surplus liquidity

Mumbai: The surge in surplus liquidity has prompted lenders to look at ways to deploy funds that give them assured returns with an aim to protect their margins. HSBC and Kotak Mahindra Bank have taken the lead, tweaking mortgage products, while some banks are preparing to introduce similar loan plans.

Banks are looking at semi-fixed home loans to deploy a surge in surplus liquidity following a record mobilisation of funds through the RBI’s FCNR(B) scheme, while protecting lending margins amid uncertainty over interest rates.

Read more: India’s bank liquidity surplus hits all-time high riding flood of dollar deposits

The special swap facility mobilised $136.4 billion in forex-inflow programs by August 31, including $127.2 billion through FCNR(B) deposits.

HSBC is offering such a product, with its three-year fixed option starting at 7.50% and a five-year fixed option at 8.25%, before switching to the prevailing floating rate.

Read more: Record FCNR (B) inflows as banks mobilise $127 bln
After the fixed rate period of three and five years, the bank will move customers to prevailing repo-rate at the time of roll-over and margin as communicated at the time of loan disbursement. Similarly, Kotak Bank is offering hybrid home loans for up to 65 months during which their interest rate and EMI remain unchanged even if the Repo Rate rises. The home loan has a fixed interest rate of 7.60% for 65 months, thereafter it will be linked to the prevailing rate.Traditionally, excess funds could be invested in government securities.

‘Risk Mitigation’

“For banks, the attraction is less about betting on the direction of rates and more about putting surplus money to work while locking in a spread,” said a bank executive. “Banks will look to deploy part of the sum into government securities but those assets carry marked-to-market risks when yields move.”