Prepayment penalty on home loans on way out: RBI

Borrowers wanting to prepay home loans can look forward to some relief as the Reserve Bank of India (RBI) today said it would hopefully scrap the prepayment penalty within a month.

"We will pursue with the banks to do this [ending prepayment penalties] as soon as possible. But should the system require some time to adjust to this, we are prepared to give them," RBI Governor Subbarao told reporters at the customary post-policy press conference here.

The quantum of prepayment penalty on floating rate home loans varies from 2% to a high of 6%. Public sector banks by and large do not levy any prepayment charges when the amount is paid by borrowers from their own sources.

The RBI policy document released earlier in the morning said, "It is proposed to implement the recommendations of the Damodaran Committee, on which a broad consensus has emerged, as also the action points which were identified by the IBA [Indian Banks' Association] and BCSBI [Banking Codes and Standards Board of India] in the last Banking Ombudsmen conference."

Ban on prepayment penalty on home loans with flexible interest rate is one among the 10 points decided during the conference held in August.

"We said we will not issue any instructions, but asked the IBA to implement the ten-point formula. The IBA is looking into it. [Deputy Governor KC] Chakrabarty will meet the IBA again, with the bank Chairmen, and hopefully in the next one month we will implement [it]," Subbarao said.

The National Housing Bank (NHB) has already directed all housing finance companies to desist from imposing a prepayment penalty on home loan borrowers.

Meanwhile, State Bank Chairman Pratip Chaudhuri said he has already done away with such penalty taking the Ombudsman's suggestions as a prudential practice.

The country's second-biggest lender after SBI, ICICI Bank, sounded non-committal on the issue. Its Chief Executive and Managing Director Chanda Kochhar evaded a direct answer when asked if her bank will follow suit. She merely said, "It is not the end of the road."