Prepayment penalty on home loans not against laws: Panel

In a major relief to the housing finance sector, the Competition Commission of India has ruled that the system of imposing penalty for pre-closure of home loans is in tune with the existing laws. The commission set aside its investigation wing’s observations that such clauses were anti-competitive in nature and hence contravention of some sections of the Competition Act.

The housing finance sector, valued at Rs 43,130 crore, had registered an annual growth rate of 12.6 per cent in 2009-10. Leading banks such as State Bank of India, HDFC, ICICI and LIC Housing Finance are key players in this business with a combined market share of 55 per cent.

The CCI order, which came on December 2, was not unanimous. Two of the members gave separate dissenting orders, while four supported the view that banks and housing finance institutions have not violated the law.

The 170-page order identified the case as “multi-dimensional” involving macroeconomic as well as consumer issues. It said CCI did look at the case “very carefully within the four walls and boundaries laid down by the Act” and found there was no abuse of dominance in this case.

“There is a vibrant market in provision of home loans, with the number of service providers and the variety in products growing consistently and continuously over a period of years. There is no bank/housing finance company in the market which can be deemed to be dominant by any of the parameters used for determining dominance….there is no agreement amongst the various service providers nor is there any uniform practice being followed by them,” the CCI order said.

Two members — P N Parashar and R Prasad — did not agree with the majority view. In his dissent order, Parashar wanted banking regulators Reserve Bank of India and National Housing Bank to frame policy guidelines if such penalty for pre-closure was essential. Prasad, in his order, wanted the banks and housing finance companies to stop the practice immediately and repay the amount they had charged as penalty.

Terming the verdict as “extremely significant”, Naval Chopra of law firm Amarchand Mangaldas said it gave hope to the business community that CCI had not been hesitant to go strictly by the law and did not favour a larger public perception. Amarchand represented HDFC Bank in this case.

CCI had asked its investigation wing — the Director General (DG) of Investigations — to look into the matter after it found a prima facie case against the four banks that were mentioned in the complaint file before CCI in 2009. The DG, who submitted his inspection report in December last year, expanded the scope of its inquiry to cover 16 entities.

The housing finance institutions mentioned in the CCI order are LIC Housing Finance Ltd, HDFC Ltd, HDFC Bank Ltd, Deutsche Post Bank Finance Ltd, Allahabad Bank, Canara Bank, Corporation Bank, ICICI Bank Ltd, India Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, State Bank of Hyderabad, State Bank of India and Vijaya Bank.