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Banks need to do away with pre-payment charges for floating home loans: RBI

Last Updated: Wednesday, September 7, 2011 - 09:55

Mumbai: Banking Ombudsmen have suggested that lenders need to compensate customers for mental harassment they suffer due to deficient services.

At their annual conference held at the Reserve Bank of India (RBI), they also suggested that banks need not impose any charges for pre-paying loans taken under floating rates by customers.

RBI or the Indian Banks Association (IBA) would examine the issues pertaining to the monetary compensation for mental harassment suffered by bank customers, the Ombudsmen suggested yesterday.

Deliberation in the conference suggested that banks may also offer long-term fixed rate housing loans to customers.

They also said lenders may address their asset liability mismatch (ALM) issues by recourse to the Interest Rate Swaps (IRS) market.

Floating rate loans 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, the Ombudsmen noted.

The banks will, however, be free to recover or charge appropriate pre-payment penalties in the case of fixed rate  loans, the 10 action points to improve customer service said.

In his his inaugural remarks RBI Governor D Subbarao said "Often, prevention was better than cure. In customer service area too, rendering good customer service was like 'prevention' and was better than the 'cure' which was the various grievances redressal mechanisms."

He also asked do all banks have customer grievances redressal officers and noted that at that level are the most important terms and conditions explained to customers before they signed the documents.

Meanwhile, Minister of State for Finance Namo Narain Meena in a written response in the Rajya Sabha Tuesday said the government in May 2010, advised PSBs, IBA and National Housing Bank that no pre-payment charges may be levied by the lending institutions when the loan amount is paid by borrowers out of their own funds.

If any pre-payment charges are to be imposed on housing loans, the same need to be reasonable and transparent and not out of line with the average cost of providing these services, Meena said.

The PSBs have reported that by and large they do not levy any pre-payment charges when the amount is paid by the borrowers from their own sources, the minister said.


First Published: Wednesday, September 7, 2011 - 09:04
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