RBI Order to Banks: Stop Prepayment penalty on housing loans

The RBI ( Reserve Bank of India) recently directed state & central co - operative banks to stop levying penalty on pre-payment of housing loans on floating interest rates with immediate effect

RBI said in a notification, "...it has been decided that banks will not be permitted to charge foreclosure charges  or pre-payment penalties on housing loans on the floating interest rate basis, with immediate effect,"

Earlier this month (June 2012), RBI had also asked the commercial banks to stop charging such fines.

 RBI said, ''The removal of pre-closure charges or pre-payment penalty on housing loans will lead to reduction in the discrimination between existing &  new borrowers and competition among banks will result in finer pricing of the floating rate housing loans. 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 said.

RBI in its monetary policy for 2012-13 had proposed that all banks should not be permitted to levy such charges with a view to bring uniformity across the banking system in the home loan segment.

The committee on Customer Services in Banks under Mr.  M. Damodaran (Ex. SEBI Chairman) had expressed that foreclosure of charges levied by banks on prepayment of housing loans was resented upon by housing loan borrowers &  the banks were hesitant in passing on the benefit of lower interest rates to existing borrowers in a falling interest rate scenario.

As such, pre closure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

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