RBI abolishes prepayment charges on home loans

The RBI announced measures that will help home loan customers. Particularly, those who feel shortchanged when they don't get the benefits of lower interest rates.

It has now removed charges and penalties for foreclosure/prepayment of home loans taken on floating interest basis.

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, the RBI said.

The Damodaran committee on customer service found that banks were hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. The RBI said that foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

Variation in interest rates on deposits to be minimal

The RBI has stipulated, that banks should not discriminate in the matter of interest rate paid on deposits, except in respect of fixed deposit schemes specifically meant for resident Indian senior citizens and single term deposits of Rs 1.5 million and above.

However, there are wide variations in banks’ retail and bulk deposits rates, making it unfair to retail depositors. Further, banks are offering significantly different rates on deposits with very little difference in maturities. This suggests inadequate liquidity management system and inadequate pricing methodologies.

The RBI has therefore, advised that banks should have a board approved transparent policy on pricing of liabilities.

Call it by a different name

Given the stigma attached to no-frills accounts and banks' tendency to mechanically try and meet the targets, the RBI has come up with a variation called a ‘basic savings bank deposit account’.

UID for everyone

Banks are being advised to initiate steps to allot a unique customer identification code (UCIC) number to all their customers.