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Home loans' pre-payment penalty scrapped

BS Repoter  |  Mumbai 

The directive assumes significance, given banks’ reluctance to implement advisory on the same.

The Reserve Bank of India (RBI) has asked the banks to waive the in The moves, though was expected, will come as a relief to home loan borrowers, who are already stretched and grappling with

Besides, the “directive” also assumes significance, given the banks' reluctance to implement the advisory on the same, even after the central bank, last month, had asked Indian Banks' Association (IBA) to implement a ten point action, which included waiver of pre-penalty charges among other things.

This apparently has not gone down well with the regulator and hence it wants the industry to implement it in a months time.

“We had asked to implement the ten point action plan. is looking at it since two months. Deputy governor will meet and some bank chairmen and the implementation will be rolled out hopefully in the next one month,” Governor said, while addressing a press conference.

“Banks had agreed when we had the discussion and now they have a problem. They may have some problem and we are giving them some time. There was a consensus on this and it will be implemented and we will try to reach a consensus even on other points. We don't want to see it happen as a directive and they also think it is necessary for the customer,” said deputy Governor

However, banks are allowed to charge appropriate pre-payment penalties in the case of fixed rate loans.

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

Last week, National Housing Bank (NHB), the regulator for housing companies, also waived the pre-penalty charges on home loans. Given that there is a possibility of a confusion among the borrowers, RBI will discuss the issue with and try to synchronise the regulations.

“We will talk to and there will be arbitrage if one regulator moves ahead. So we will talk to and see if there is some synchronisation possible so that both borrowers and lending institutions have time to adjust,” Subbarao added.

Besides, in a bid to improve the customer service in banks, the central bank has also asked the banks to implement the recommendations of the Damodaran Committee, on which a broad consensus has emerged. In May, 2010, recognising the need for revisiting the issue of customer service in banks, RBI constituted a Committee, under the Chairmanship of The report was published in July 2011, broadly suggests ways to address common grouses on shifting loans, minimum bank balance and parity in floating-rate home loans to customers.

It also proposed to raise the insurance on bank deposits to Rs 5 lakh and setting up single common toll free call number for customer services for all banks.

First Published: Wed, October 26 2011. 00:27 IST