Don't levy pre-payment charges on home loans: RBI to banks

Removal of foreclosure charges likely to reduce discrimination between existing & new borrowers, encourage finer pricing

Providing relief to home loan borrowers, the Reserve Bank today asked banks not to levy any penalty on pre-payment of loans taken on floating rate.

"Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard," RBI said in the annual monetary policy announcement for 2012-13.

"Accordingly, it is proposed not to permit banks to levy foreclosure charges or pre-payment penalties on home loans on a floating interest rate basis," it said.

It is believed that removal of foreclosure charges or prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate.

Detailed guidelines in this regard will be issued separately, RBI said.

Some banks were charging pre-payment penalty of 1-2 per cent of the outstanding loans.

Last year, a consensus was reached at the Banking Ombudsmen Conference to the effect that banks should not impose pre-payment charges on loans with a floating rate of interest.

The policy noted that the Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board.

This is, especially, since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario.

As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

Last year, housing finance regulator National Housing Bank (NHB) directed all housing finance companies to desist from imposing a pre-payment penalty.