The Reserve Bank of India has expressed its displeasure with a section of banks levying high prepayment penalty on foreclosure of housing loans. The central bank is also weighing options to tell banks to ease the burden on borrowers willing to prepay the loan fully, even as the Competition Commission of India finds such penalty legally valid.
Banks like ICICI Bank asks home loan borrowers to pay up to 2% of the outstanding balance plus service tax and surcharges in case of full prepayment. According to the banking regulator, some banks even charge as high as 5% on foreclosure of loans. For instance, IndusInd Bank charges up to 4% of the principal outstanding in some cases.
RBI's customer care committee discussed this issue last week. "RBI is clearly not happy with high prepayment charges. But should the regulator put a ban on prepayment charges is still a matter of further discussion,” said a senior RBI official, who was part of the discussion.
Responding to a query under the Rights to Information Act exactly a year ago, the banking regulator had said it does not approve of penalties on foreclosure of loans. But it has done little to stop it.
If it does now, it will follow its subsidiary National Housing Bank, which has directed housing finance companies (HFCs) in October last year not to levy any penalty in the event of foreclosure of housing loans, if the borrower pays if from its owned resources.
Banks charging the penalty justify it by saying that prepayment of loans creates gaps in their asset-liability management. But the central bank feels that banks should be in a position to absorb it as the cumulative prepayment happens to be a small fraction of the overall loan portfolio.
Despite the absence of specific guidelines for banks on foreclosure of loans, the country’s largest lender, the State Bank of India , spares its home loan borrowers from paying prepayment charges.
HFCs or SBI, however, levy a penalty if the loan is prepaid out of borrowed money.
This issue has attracted absorbing debateaftertheCompetitionCommissionof India’s ruling that imposing penalty for pre-closure of home loans is in tune with the existing laws. The commission has, in fact, set aside its investigation wing’s observations that such clauses were anticompetitive in nature and hence contravention of some sections of the Competition Act.
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