Floating loan prepayment levy off

Mumbai, Sept. 6: Home loan borrowers can now repay their floating rate loans without attracting a penal levy on prepayment.

Most lenders charge a penalty of 2 per cent or more on the outstanding amount if a borrower decides to stump up the money and close the loan long before its tenure is due to end.

At the annual conference of banking ombudsmen held at the Reserve Bank of India on Monday, it was decided to direct banks not to charge the levy on floating rate loans.

The levy has often been a sore point of contention between borrowers and banks. While customers have been lobbying to scrap the levy, banks have justified the charge on the ground that prepayment of a loan affects their asset-liability management.

Apart from the interest rate loss, bankers have argued they levy the charge to deter customers from switching to another lender.

Some banks waive the prepayment charge if the borrower can show that he is paying back the loan from his resources.

In December, the Competition Commission of India ruled that the levy of a pre-payment penalty did not run foul of competition laws.

The RBI, however, has expressed its displeasure over the penal charge.

The crucial decision on withdrawal of prepayment charges was one of the 10 “action points” taken at the conference yesterday.

RBI governor Duvvuri Subbarao inaugurated the conference, while deputy governor K.C. Chakravarty chaired the meeting. M.D. Mallya, chairman of Indian Banks’ Association, and State Bank chairman Pratip Chaudhuri were among those who attended.

“Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it to borrowers and, thus, banks only substitute interest rate risk with potential credit risk,” the RBI said while justifying the decision to scrap the penal levy.

The meeting also decided that banks could also offer long-term fixed rate housing loans to customers. However, in this case, banks have been given the freedom to charge appropriate prepayment penalties.

The meeting also proposed several steps to improve customer services at banks. Lenders have been told to begin the process of providing one view of all bank accounts of a customer, including deposits, loans and others with the help of available technology. They have been asked to complete the process within a year.

Banks have also been directed to issue tax deduction at source (TDS) certificates completed in all respects to the account holders and despatch them to their mailing address.

Further, in the case of ATM or Internet-based banking transactions, if there is any monetary dispute involving the customer and the bank, the onus will be on the bank to prove the customer’s negligence or mistake. The RBI said the customer must also be compensated for the losses arising out of non-authorised transactions.