RBI Firm on Scrapping Pre-payment Penalty
A person familiar with the plan told that there is a possibility that banks will be ordered to scrap penalty on pre-payment of all retail and small corporate loans and do away with fines for failure to maintain minimum balance if the recent ‘nudge’ does not work by the Reserve Bank.
Since the entire system has moved to floating rates be it deposits or loans, as per RBI officials there is no justification for banks to charge pre-payment penalty on any loan. Lenders have been advised by central bank to stop levying such penalties.
Moreover it is found that banks do discrimination between retail and big corporate clients because they usually arm twist lenders to charge them lesser due to their sheer size and have no penalty clause. On the other hand, when there is any default by big corporate, they reorganize loans and pay lower interest rates and the tenor is extended.
A central banker said that all prepayments may be abolished. When loans of all kinds are based on floating rates there is no sense of penalty.
If customers attempt to pre-pay mortgage, domestic banks charge between half and four percentage points of outstanding loans. The customers who want to exit the debt burden early cannot do so due to these charges and it is a good revenue scheme for some banks. It also helps banks tie customers down. When competition lures existing customers with lower interest rates it creates uncertainty on asset-liability planning.RBI official said, “If the lender has the right to recall a loan, the borrower should also have the right to repay a floating rate loan where banks may not incur interest rate risk.”
Aditya Puri, chief executive at HDFCBank, said if banks have consumer interest in mind they will not push this.
The only alternative is the charge for these services, but if it is done so customers have to pay more but this is only a suggestion as IBA will get back to them.
Charges vary between Rs 500 and Rs 2,000 for non maintenance of minimum balance. Many a time’s banks and the sector regulator are on a collision course. The RBI had directed banks not to charge any penalty on prepayment of home loans, three years ago, after a similar nudge did not work.
Although banks did not stop to charge pre-payment penalty on other floating rate loans products such as education, personal and car loans.
AC Mahajan, chairman of Banking Codes and Standard Board of India alleged, “The philosophy of not charging prepayment penalty on floating home loan account should be mutatis mutandis applied to other floating retail loan.”
Mahajan said bank should migrate customers account to basic banking account where they phase out value-added services, if a customer is not able to maintain account.
Source: Times of India
AC Mahajan, Aditya Puri, Banking Codes and Standard Board of India, Central bank, Corporate clients, Domestic banks., Floating rate, HDFCBank, Home loans, IBA, Interest rates, lenders, Minimum balance, Penalties, Reserve Bank, Small corporate loans
