RBI directs banks not to levy foreclosure charges

The Reserve Bank of India has directed banks to not levy charges for foreclosure/prepayment of home loans taken on floating interest rate basis, with immediate effect.

In a notification, the RBI said though many banks voluntarily abolished prepayment penalties on floating rate home loans in the recent past, there was a need to ensure uniformity across the banking system.

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 banks will result in finer pricing of the floating rate home loans, it added.

Some banks have waived penalties on all floating rate home loans prepaid either from own sources or via balance transfer. Over 90 per cent of home loans that are taken from banks are on floating-rate basis. The Damodaran Committee on Customer Service has observed that foreclosure charges levied by banks on prepayment of home loans were resented 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 rate scenario.

Further, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

The RBI directive comes in the wake of the recommendations of the Damodaran Committee.

kram@thehindu.co.in