RBI insists on doing away with Pre-payment Penalty
The RBI may issue orders to scrap penalty on pre-payment of all retail and small corporate loans. The central bank disputes the practice of charging pre-payment penalty on any loan since the entire system has moved to floating rates — be it deposits or loans — where rates are charged based on the prevailing markets, though with a lag of a few days or weeks. The lenders were advised, last week to stop levying such penalties.
RBI official says that 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. Around 25% of bank loans are retail loans while the share of small and medium enterprise loans is about 15%. The central bank’s governor Raghuram Rajan had advised, during the monetary policy review last week, banks to stop charging prepayment penalty on floating rate loans and non-maintenance of minimum balance. The banks, however, point out that there is a cost involved regarding cheque books, ATM transactions and account statements, necessitating a minimum balance of Rs 20,000.
Source: The Times of India
Central bank, deposits, Governor, lenders, Loans, monetary policy, Penalties, prepayment, Prepayment charges, prepayment charges for home loan, prepayment fee, Prepayment of Floating Rate Home Loans, prepayment of home loans, Prepayment penalty, raghuram rajan, RBI
