In 2012, Reserve Bank Of India, vide Notification No: DBOD. No. Dir.BC.107/13.03.00/2011-12 dated June 5, 2012 , had advised banks not to charge any penalities on foreclosure on floating rate home loans.
However, nothing was mentioned about the other term loans wherein the interest rate was on floating rate.
This anamoly was corrected today vide Reserve Bank of India Notification No: RBI/2013-14/582 DBOD. Dir.BC.No.110/13.03.00/2013-14 dt.May 7, 2014. Reserve Bank of Indis has advised banks not to charge foreclosure charges/prepayment penalties on all floating term loans sanctioned to individual borrowers.
This circular comes to effect, immeidately.
Background: Part B of the First Bi-monthly Monetary Policy Statement 2014-15 announced on April 1, 2014 proposing certain measures for consumer protection. It was indicated that in the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty.
Floating Rate Term Loans means the interst charged to the term loans is plus or minus a fixed benchmark. The benchmark rate is fixed every quarterly or half-yearly depening on the respective countrie’s practice