No prepayment penalty on floating home loans - says RBI

No prepayment penalty on floating home loans - says RBI

No prepayment penalty on floating home loans - says RBI

In a move that is sure to bring smiles on the faces of home loan takers, RBI in a meeting with Banks representative agreed to remove the prepayment charges on floating rate loans. Therefore, the prepayment penalty, a nightmare suffered by individual borrowers of home loans, is set to end. The exact date by which this notification will be implemented is not known.

The move is aimed at bringing fairness in bank charges. Prepayment penalty in some banks can range between 1 – 3 % on the outstanding loan amount. The removal of prepayment penalty will make it easier for customers to partly pay their loans in case they are able to generate surplus cash or shift loans to other banks if they get a better interest rate. Also, it will increase competition among banks. Already a few banks like Axis Bank do not charge pre-payment charges.

Banks have also been asked to revive fixed rate home loan products, which have become almost a thing of the past, as they are increasingly focusing on floating rate schemes to protect themselves from interest rate fluctuations.

The central bank is of the view customers should not be exposed to rate volatility and banks should be able to hedge their risk through appropriate instruments.

“Banks may also offer long-term fixed rate housing loans to customers and address their asset-liability mismatch issues by recourse to the Interest Rate Swaps market. Floating rate loans pass on the interest rate risk from banks that are better placed to manage it to borrowers and, thus, banks only substitute interest rate risk with potential credit risk,” the RBI said.

However, the RBI has allowed banks to charge appropriate prepayment penalties in the case of fixed rate loans where the bank takes burden of interest rates fluctuations.

These decisions were taken at the annual conference of banking ombudsmem in Mumbai. The conference, inaugurated by RBI governor D Subbarao and chaired by RBI deputy governor K C Chakrabarty, was also attended by Pratip Chaudhuri, chairman of the State Bank of India and M D Mallya, chairman of the Indian Banks’ Association, among others.

Last Updated: Thu Sep 05 2013

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