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RBI to RRBs: Stop charging prepayment penalty on home loans

Last Updated: Monday, June 18, 2012 - 21:34

New Delhi: The Reserve Bank Monday asked Regional Rural Banks (RRBs) to stop charging penalty on pre-payment of home loans taken on floating interest rates.

"It has, therefore, been decided that Regional Rural Banks will not be permitted to charge foreclosure charges or pre-payment penalties on home loans on floating interest rate basis, with immediate effect," RBI said in a notification.

The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans, it said in a notification addressed to all Regional Rural Banks.

Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system, it added.

Earlier this month, RBI directed all the scheduled commercial banks excluding RRBs to desist charging pre-payment penalty on floating home loan scheme.

The RBI noted that the Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented by home loan borrowers.

This is particularly so considering that banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario, it added.

With an aim to ensure uniformity across the banking system in home loan segment, the RBI in the annual monetary policy for 2012-13 had proposed "not to permit" banks to levy the charges.

Last year, a consensus was reached at the Banking Ombudsmen Conference that banks should not impose pre-payment charges on loans with a floating rate of interest.

Earlier, housing finance regulator National Housing Bank (NHB) had directed all housing finance companies to desist from imposing a pre-payment penalty.


First Published: Monday, June 18, 2012 - 21:34
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