Stop Charging Prepayment Penalty on Floating Rate Home Loans: RBI

The Reserve Bank of India (RBI) has already proposed not to levy prepayment or foreclosure charges by banks on home loans in its monetary policy for 2012-13. This decision was taken with an aim to ensure uniformity across the banking system in home loan segment.

The RBI noted that the Damodaran Committee had observed that prepayment penalty levied by various banks on home loans were resented by home loan borrowers. It also said that in this falling interest rate scenario, banks were found to be hesitant in passing on the benefits of lower interest rates to the home loan borrowers. Some banks are still charging prepayment penalty of 1-2% of the outstanding loans. Also, foreclosure charges are seen as a restrictive practice that made borrowers to switch over to cheaper resource available.

Thus, in a relief to borrowers, RBI asked all banks to immediately stop charging prepayment penalty on floating rate home loans. The removal of penalty will lead to reduction in the discrimination between new and existing borrowers.