No prepayment penalty on floating home, auto loans

Prepayment penalty, a nightmare suffered often by individual borrowers of home or car loans, is set to end. In a meeting with the Reserve Bank of India held on Monday, banks agreed to waive prepayment charges on floating rate loans, the central bank said today.

The move is aimed at bringing fairness in bank charges. Prepayment penalty in some banks can range between one and five per cent on the loan due, depending on the nature of the loan.

The removal of prepayment penalty will make it easier for customers to shift loans to other banks if they get a better interest rate. Also, it will increase competition among banks.

Banks have also been asked to revive fixed rate home loan products, which have become almost a thing of the past, as they are increasingly focusing on floating rate schemes to protect themselves from interest rate fluctuations.

The central bank is of the view customers should not be exposed to rate volatility and banks should be able to hedge their risk through appropriate instruments.

“Banks may also offer long-term fixed rate housing loans to customers and address their asset-liability mismatch issues by recourse to the Interest Rate Swaps market. Floating rate loans pass on the interest rate risk from banks that are better placed to manage it to borrowers and, thus, banks only substitute interest rate risk with potential credit risk,” the RBI said.

However, the RBI has allowed banks to charge appropriate prepayment penalties in the case of fixed rate loans.

Regarding failed ATM transactions, the onus will now be on banks to prove the customer’s negligence or mistake. The customer must be compensated for losses from unauthorised transactions.

Banks have been asked to initiate the process to provide a “one view of all bank accounts of a customer like deposits and loans and the process needs to be completed in one year”.

These decisions were taken at the annual conference of banking ombudsmem in Mumbai. The conference, inaugurated by RBI governor D Subbarao and chaired by RBI deputy governor K C Chakrabarty, was also attended by Pratip Chaudhuri, chairman of the State Bank of India and M D Mallya, chairman of the Indian Banks’ Association, among others.

The Indian Banks’ Association (IBA) has been given the mandate to standardise the most important terms and conditions (MITC) for at least 10 important banking transactions and circulate among banks for adoption.

It was also decided that issues pertaining to monetary compensation for mental harassment suffered by bank customers would be examined by banks and the regulator.

The regulator is also mulling the idea of providing insurance of some reason-able amount on customers’ credit and debit card transactions.