The Committee on Customer Service in Banks Chairman, M.Damodaran had observed that
foreclosure charges levied by Banks on prepayment of home loans are resented
upon by home loan borrowers across the board especially since banks were found
to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rates scenario.
As such, foreclosure charges are seen as a restrictive practice
deterring the borrowers from switching over to cheaper available source.
The
removal of foreclosure charges/prepayment penalty on home loans will lead to
reduction in the discrimination between existing and new borrowers and
competition among the banks will result in finer pricing of the floating rate home loans.
Though
many banks have in the recent past voluntarily abolished prepayment penalties
on floating rates home loans, there is a need to ensure uniformity across the
banking system.
It
has, therefore, been decided that banks will not be permitted to charge
foreclosure charges/pre-payment penalties on home loans on floating interest rate
basis, with immediate effect.
For
example a borrower has a loan of Rs. 40 lakhs. The principle still outstanding as on date is Rs. 38 lakhs. In case he prepays, he had to shell out
around Rs.76,000/- in addition to the principle loan amount as a prepayment
penalty.
It
is felt that the removal of foreclosure charges/ Prepayment penalty on home
loans will lead to a reduction in the discrimination between existing and new
borrowers and the competition among banks will result in finer pricing of home loans with the floating rate.
Though
many banks have, in the recent past, voluntarily abolished the prepayment
penalties on their floating rate home loans, there is a need for ensuring
uniformity across the banking system in this regard. Accordingly, it is proved not to permit
banks to levy foreclosure charges/prepayment penalties on home loans on a floating interest rate basis.
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