Prepayment penalty not monopolistic: Banks

Banks have expressed concern over the Competition Commission’s intervention on home loan pre-payment penalty, as they fear 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 to sustain and promote competition, sent notices to at least 15 banks, non-banking financial companies (NBFCs) and the Indian Banks’ Association (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, making it clear the removal of prepayment penalty would result in higher lending risk and might cause asset-liability mismatch in banks. IBA, which is the industry lobby of Indian lenders, said banks would 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 increase lending rates by at least 0.25 per cent to cover the risk,” a top IBA official said. IBA would respond to the CCI notice this week, the official said.

CCI is believed to have observed that loan prepayment penalties will suppress competition in the home loan market by limiting the chances of borrowers switching their loans to another lender.