RBI fiat to banks not levy charges on floating rate loans

Now you can pre-pay your home loans, vehicle loans or personal loans without having to worry about what your bank might charge you as penalty.

The RBI has directed banks to not levy any penalty on individual borrowers pre-paying floating rate term loans.

Rising rates scenario

“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.

Customers tend to prepay (foreclose) their loans when they find that interest rates on their term loans have risen.

Some customers foreclose their loans by switching to banks that offer loans at lower rates.

Some banks charge as much as two per cent of the outstanding amount as penalty for foreclosure.

The RBI had earlier said that banks cannot discriminate between a new and an old customer by offering the two different interest rates.

This is a consumer friendly move, said V Kannan, Chairman and Managing Director, Vijaya Bank pointed out that banks faced the prospect of losing customers due to the levy of pre-payment penalties.

“Suppose a bank charges a customer a pre-payment penalty of 0.10 or 0.15 per cent (of the outstanding home loan) then is it ready to lose a customer who has been with it for 10 years? The customer is not going to just close the housing loan but his entire banking relationship,” Kannan pointed out.

(This article was published on May 7, 2014)
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