RBI ends penalty on prepayment of home loans

Home loan clients will now find it easier to switch banks to avail of better rates, as the Reserve Bank of India has made it mandatory that banks cannot levy a prepayment penalty on floating home loans.
 
Under persuasion from the central bank, several banks, including the State Bank of India, Axis Bank, and ICICI Bank have stopped levying such penalties. But many other banks continue to do so. Now under the RBI diktat they will have to end the practice.
 
 ''Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard,'' said RBI governor Duruvvi Subbarao. ''Accordingly, it is proposed not to permit banks to levy foreclosure charges or prepayment penalties on home loans on a floating interest rate basis.''
 
Some banks were charging pre-payment penalty of 1-2 per cent of outstanding balance of the loan.
 
The removal of foreclosure charges or prepayment penalty on home loans will reduce the discrimination between existing and new borrowers.
 
Last year, a consensus was reached to the effect that banks should not impose prepayment charges on loans with a floating rate of interest. Following this housing finance regulator National Housing Bank directed housing finance companies to stop imposing prepayment penalties.
 
RBI also asked banks to minimise the wide variation in rates offered to retail and bulk depositors on deposits with very little difference in maturities. It said such practices were unfair to retail customers.
 
"There is a need to bring discipline ... we are flagging the issue in the interest of the customer and the system," said K C Chakrabarty, deputy governor, said. However, SBI chairman Pratip Chaudhuri reportedly disagreed. "High-value customers always expect a premium. The higher the value of the deposit, the more will be the premium expectation, and rightly so." he said.

In another important move, RBI has mandated that banks offer a basic savings and deposit account to all their customers. These accounts should have some minimum common facilities and should not prescribe a minimum balance.

Currently, basic banking was linked only to no-frills accounts; now it will be made available to customers, rich or poor.

Further, banks have been directed to frame a policy on unclaimed deposits, a grievance redressal mechanism to resolve complaints quickly, record-keeping and review of such accounts regularly.

RBI has also asked banks to allot a unique customer identification code to all their customers, whatever the product. It said that for new customers the unique number could be provided as soon as they entered the new relation while the process for existing customers should be completed by end-April 2013.