Charging Prepayment Penalty on Home Loans Restricted By RBI

Prepayment of home loanRBI restricted in relation to charging prepayment penalty on home loans. Therefore, home loan customers will have greater flexibility to switch to banks that offer better rates with the banking regulator having banned lenders from charging a prepayment penalty on floating rate home loans.

For over a year, RBI persuaded banks to desist from charging a prepayment fee but moral suasion from the central bank was to no avail. On Tuesday, RBI barred banks from charging any fee from a customer who wants to repay an outstanding loan and close the account.

Housing finance regulator National Housing Bank (NHB) has already barred home finance companies from charging any prepayment penalty. Among banks, State Bank of India was the first to do away with the pre-payment fee on both fixed and floating rate loans. Following this, nearly 20 banks withdrew the penalty on floating rate loans. However, most lenders continue to charge the penalty on premature closure of fixed rate loans.

“The RBI move ends a year-long debate on whether banks should charge any prepayment fee on floating rate loans,” said S Raman, CMD, Canara Bank.

“Many banks initially resisted doing away with the prepayment penalty arguing that it would impact their asset liability management. While most banks did not charge any fee if a customer repaid the loan with her own resources, they charged 0.5-2% if the customers repaid the loan in order to switch to other banks.”

RBI also asked banks to minimize the wide variation in rates offered to retail and bulk depositors on deposits with very little difference in maturities. It said such practices were unfair to retail customers.

There is a need to bring discipline…. we are flagging the issue in the interest of the customer and the system,” said KC Chakrabarty, deputy governor, justifying such a step. However, SBI chairman Pratip Chaudhuri chose to disagree. “High-value customers always expect a premium. Higher the value of deposit more will be the premium expectation and, rightly so.” he said.

In another important move, RBI has mandated that banks offer a basic savings and deposit account to all their customers. These accounts should have some minimum common facilities and not prescribe a minimum balance.

Currently, basic banking was linked only to no-frills accounts, which will now be made available to customers, rich or poor. Further, banks have been directed to frame a policy on unclaimed deposits, a grievance redressed mechanism to resolve complaints quickly, record-keeping and review of such accounts regularly.

RBI has also asked banks to allot a unique customer identification code to all their customers availing of different products from a bank. It said that for new customers the unique number could be provided as soon as they entered the new relation while the process for existing customers should be completed by end-April 2013

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