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Atul Patankar

RBI against loan prepayment penalty

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Atul Patankar

As reported by Himanshi Dhawan at timesofindia.indiatimes.com 22 September 2009

 

NEW DELHI: The Reserve Bank of India has frowned on the practice of banks slapping penalty charges on premature repayment of loans, saying it did not approve of such charges. However, it stepped back from any role in actually enforcing its point of view.

 

Replying to a query filed under the Right to Information Act, the central bank said, "RBI does not approve of charging penalty or foreclosure charges. We have... advised banks to lay out appropriate internal principles and procedures so that usurious interest including processing and other charges are not levied by them on loans and advances."

 

The central bank also admitted that it had received complaints on charging of penalty on premature payment of loans by banks who had been "suitably advised". But RBI was silent on what action had been taken against banks who refused to follow the advice. The charges disadvantage those wanting to either pay off a loan or move to one offering better terms.

 

Even though most banks operating in India impose such charges, RBI's reply to the RTI query noted, "In the context of granting greater functional autonomy to banks, operational freedom has been given to scheduled commercial banks on all matters pertaining to banking transactions, including foreclosure of loans."

 

The applicant asked RBI if it was aware of private and multinational banks levying foreclosure charges or penalties for premature payment of loans and what steps had been taken in this matter. RTI activist Subhash Chandra Agarwal also asked what steps had been taken by RBI to ensure that uniform interest rates were charged by all banks.

 

For credit card operations, RBI has advised banks to formulate a well documented policy and a fair practice code that charges interest rates that could depend on the payment or the default history of the cardholder. "There should be transparency in levying of such differential interest rates... banks should upfront indicate to the credit card holder, the methodology of calculation of finance charges with illustrative examples, particularly in situations where a part of the amount outstanding is paid by the customer," RBI's CPIO said.

 

The central bank said in order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. "Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate," it said.

 

Source: RBI against loan prepayment penalty - India Business - Business - NEWS - The Times of India

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Atul Patankar

As reported by Anto Antony & Souvik Sanyal at economictimes.indiatimes.com on 20 February, 2010

 

NEW DELHI: The Competition Commission of India (CCI) has asked banking regulator RBI if it is planning to give banks any direction on the

practice of charging prepayment penalties on retail loan customers, ahead of its much-anticipated verdict on the issue.

 

The competition watchdog is expected to come up with its verdict within a fortnight on whether such levies violate competition laws of the country, said a CCI official. The commission’s communication with the RBI is aimed at avoiding regulatory conflicts with the banking regulator, he said, requesting anonymity.

 

CCI will either cap pre-payment penalties or will do away it completely, the official said. Banks and NBFCs charge pre-payment penalties of up to 3% when a customer prepays retail loans to cover losses that may arise from asset-liability mismatches. CCI, which had investigated the matter, had commented that the practice is anti-competitive and leads to the abuse of their dominant position by the financial institutions.

 

CCI chairman Dhanendra Kumar refused to comment on the issue saying that CCI “will not comment on any case on which verdict is awaited.”

 

CCI’s investigation into the matter has revealed that the practice of banks and finance companies to charge pre-payment penalties suppress competition in the home loan market by limiting the ability of borrowers to switch their loans to another lender.

 

While the RBI’s views are not clearly known yet, the central bank in response to an RTI application had said: “Banks including public sector banks generally levy pre-payment charges on loans as pre-payment on loans affect their asset-liability management. There is no uniformity in the practice followed by various banks as the banks have been given freedom to fix service charges for various types of services rendered by them.”

 

While responding to notices from the CCI, financial institutions have pointed out that removing prepayment penalty would result in higher lending risk and might cause asset-liability mismatch in banks.

 

“Our legal department has looked into the issue and we do not think pre-payment charges violate competition laws,” said an official with Indian Banks Association. The banks will have to increase lending rates by at least 0.25 basis points to cover the cost of risk of prepayment, he said.

 

Source: CCI sends query to RBI on prepayment penalty- Policy-Economy-News-The Economic Times

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