Economic feasibility of interest free products in Indian commercial banks

Abstract

The report from the committee on medium–term path on financial inclusion released by RBI in December 2015 had recommended commercial banks to have an interest free window. In this context, we have explored the implementation of interest free housing loans (an asset product) in Indian commercial banks. We developed a financial model for such a home loan product based on rental income. Then, we went on to explore the fit of this product in commercial banks in India. Our key finding is that since the rental yields are very low, such a product may not be economically feasible in Indian commercial banks. Hence, for interest free assets to exist, we also need to have interest free liabilities.