RBI asks banks not to levy penalty on pre-payment of loans

Says rule effective immediately

Providing relief to borrowers, Reserve Bank today directed banks not to levy any penalty on individual borrowers for pre-paying floating loans.

"...It is advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect," RBI said in a notification.

Floating loan products include housing, corporate, vehicle and personal loans.

In the first bi-monthly monetary policy statement for 2014-15 released last month, the RBI had said banks should consider allowing their borrowers the facility of prepaying floating rate term loans without any penalty in the interest of their customers.

Some banks are charging pre-payment penalty of up to 2% of the outstanding loans.

Two years ago, RBI had barred banks from levying foreclosure charges or pre-payment penalties on home loans on floating interest rate basis.

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, RBI had said.

Yesterday, the RBI asked banks not to levy penalties on customers who don't maintain a minimum balance in any inoperative account, as part of a consumer protection initiative.

Several banks, including the State Bank of India, do not levy any charge if the minimum balance is not maintained in an inoperative savings account.

The RBI directed banks in 2012 not to charge customers for non-operation or activation of basic savings bank deposit accounts.