Auto Segment
Mutual Fund Segment
My Budget
Expert Speak
In Association With
Business Standard

Banks start waiving prepayment penalty

Related News

Initially reluctant to waive the on floating rate retail loans, banks have now started to fall in line with the regulator’s advice. The Reserve (RBI) had questioned the necessity of levying charges that penalise borrowers repaying their loans before the maturity period.

State Bank of India (SBI), which earlier waived the prepayment penalty for new customers, has now extended the benefit to existing customers. Bank of India, and United Bank of India have also waived the prepayment penalty, and a few other public sector banks may follow suit.

“If the regulator ultimately wants it, we need to fall in line. The prepayment penalty is not an avenue for bankers to make money, but a mechanism to recover costs due to mismatch in assets and liabilities. If feels we have to do away with that, as bankers we will have to find a way to recover the cost,” said K R Kamath, chairman and managing director, Punjab National Bank.

Prepayment penalty on home loans

Penalty (%)

State Bank of India Nil
ICICI Bank 2-4
Punjab National Bank 2
Bank of Baroda 2
Bank of India Nil
Axis Bank Nil
Union Bank of India 2
Standard Chartered Bank 2.5
United Bank of India Nil
Source: Banks

Bankers said when long-term loans were offered to borrowers, lenders raised long-term deposits to match their assets and liabilities. So, when the loans are pre-paid, banks continue to have long-term deposits on their books, leading to a mismatch.

“Banks have already agreed, but they are not issuing the guideline (to their branches) that you cannot charge prepayment penalty. We are not clear why banks charge the prepayment penalty,” said K C Chakrabarty, deputy governor, RBI.

“RBI has asked for the views of IBA (Indian Banks’ Association) on this. We are working on it...It will happen in the next couple of weeks,” said M D Mallya, chairman and managing director, Bank of Baroda, and chairman, IBA.

“We have waived the prepayment charges on floating rate loans, ahead of the industry. For fixed rate loans, there is still a prepayment charge,” said Pratip Chaudhuri, chairman, SBI. Bank of India has also stopped charging the prepayment penalty on floating rate retail loans, while Indian Bank has waived these charges for both fixed, as well as floating rate advances. “Our view is our interest rates should be so competitive that the customer should always stay with us,” said T M Bhasin, chairman and managing director, Indian Bank.

M Narendra, chairman and managing director, Indian Overseas Bank, said the lender did not levy prepayment charges on small-ticket loans. It would also waive such charges on big-ticket loans if the regulator wishes so. “I don’t think it is a very big issue. In fact, it may benefit public sector banks, since our pricing is competitive, transparent and there are no hidden charges,” said M G Sanghvi, executive director, Bank of Maharashtra.

Read more on:   

Read More

Going out of Citi Suvidha? Keep higher balance

Citi India’s ‘Suvidha’ salary account holders will need to maintain a monthly net relationship value of Rs 1 lakh if their salary is no longer ...

Recommended for you

Quick Links

More news from Finance Rss icon

Rabobank India CEO steps down

Surojit Shome had taken over as the MD & CEO in 2009

SBI gets shareholders' nod for raising Rs 15,000 cr from market

The bank requires adequate capital to match the anticipated growth in asset and comply with stipulated level of capital adequacy

IRDA to end licensing system for insurance agents

Regulator has also been planning to treat health insurance as a stand-alone segment

Back to Top