Loan prepayment does not violate competition laws:Banks

Banks have expressed concern over the Competition Commission's intervention on homeloan prepayment penalty issue as they fear that this would put pressure on costs, increase risk and even lead to higher lending rates.

Last month, the Competition Commission of India (CCI), the apex body that operates to sustain and promote competition, sent notices to at least 15 banks, NBFCs and IBA seeking explanation on why they penalise borrowers who choose to foreclose loans.

According to sources, many of these institutions have already replied to CCI, to make it clear that the removal of prepayment penalty will result in higher lending risk and may cause asset-liability mismatch in banks.

Indian Banks' Association (IBA), which is the industry lobby of Indian lenders, said banks will send their responses individually to CCI as early as this week.

"IBA's view is that this (prepayment penalty) does not violate competition laws. Moreover, if CCI insists that banks should stop penalising foreclosures, banks will have to hike the lending rates by at least 0.25 per cent to cover the risk," a top IBA official told PTI.

IBA would respond to competition commission's notice this week, the official said.

In the communication, CCI is understood to have observed that loan prepayment penalties will suppress the competition in the homeloan market by limiting the chances of a borrower to switch their loan to another lender.