Home Loans- Indian Banks – Levy of fore-closure charges/pre-payment penalty. Is this a pointer to a Interest Rate Cut?

One more promise of RBI outlined in Paragraphs 81 to 83 of Monetary Policy Statement 2012-13, has been made effective from today I.e 05/06/2012.

Reserve Bank of India, DBOD has advised Banks not to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.

This is also in line with DBOD. No. Dir. BC. 56/13.03.00/2006-2007 dated February 2, 2007 on reasonableness of bank charges. The cir no 56, is the first in the series to ensure that Bank customers are not over-charged for Basic Banking Services.

In the recent past, there had a large spate of complaints on the charging of foreclosure/prepayment penalties on home loans. Such complaints were largely related to home loans floating interest rates basis. Over the years, the Banks too have put in their points. RBI after considering both the customers and banks views, and in the larger interests abolished the concept of foreclosure/prepayment penalties.

The main reason for customers anger, was that Banks were found to be hesitant in passing the benefits of the lower interest rates to the existing borrowers in a falling rate scenario.

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.

In the recent Banks, many banks have abolished prepayment penalties on floating rates on home loans. But there was no uniformity across the banking spectrum.

 To ensure equality, RBI today has advised Banks to abolish the concept of penalties on foreclosure/prepayment.

 Links to State Bank of India, Bank of Barodaterms and conditions for Home Loans.

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