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Pre Payment Penalties on Home Loan Closure Abolished as Per RBI Directive

Reserve Bank of India has asked banks not to levy any penalty on pre-payment of loans taken on floating rate. This is going to provide a relief to home loan borrowers as banks do not want borrowers to close the home loans which they have taken on the higher rate of interest. The announcement and its implementation forcefully is credit worthy on te part of RBI.

The decision has been taken at RBI credit policy review (annual monetary policy announcement for 2012-13) to bring a uniformity in whole system.

The policy noted that the Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board as one has to shell out a large amount as a prepayment charges which force the borrowers to keep servicing the higher rate interest loans.

RBI had to step in the whole mechanism as a consensus was reached last year at the Banking Ombudsmen Conference to the effect that banks should not impose pre-payment charges on loans with a floating rate of interest. Moreover the housing finance regulator National Housing Bank (NHB) has directed all housing finance companies to desist from imposing a pre-payment penalty. However still a large number of banks have been observed not passing on the benefits to the old clients.

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