RBI has already prohibited banks from charging penalty for prepayment of home loans and now the same has been extended to individual term loans
The Reserve Bank of India (RBI), on Wednesday said that banks should allow customers to prepay floating rate term loans without any penalty.
“It is advised that banks will not be permitted to charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,” the RBI said in a statement.
The central bank in its first bi-monthly policy on 1 April 2014 had said that banks should also not take undue advantage of customer difficulty or inattention. "In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty," RBI had said.
RBI also said that in the interest of their customers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. RBI has already prohibited charging of penalty for prepayment of housing loans of individual customers, and wanted to extend the same benefit to all type of floating rate term loans, which will help small and medium enterprises as well.
Customers tend to pre-pay their term loans when they find that interest rates have risen. Some customers foreclose their loans with existing banks by switching to banks who offer loans at lower rates.
Earlier in June 2012, the RBI had asked commercial banks to stop levying penalty on pre- payment of home loans on floating interest rates. "Removal of foreclosure charges or pre-payment 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," the central bank had said.
RBI in its monetary policy for 2012-13 had proposed that 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 M Damodaran had expressed that foreclosure of charges levied by banks on prepayment of home loans was resented upon by home loan borrowers and the banks were hesitant in passing on the benefit of lower interest rates to existing borrowers in a falling interest rate scenario.
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