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Atul Patankar

RBI opposes penalty on loan prepayment, but takes no action

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Atul Patankar

As reported at economictimes.indiatimes.com on 02 February, 2010


NEW DELHI: The Reserve Bank of India (RBI) does not approve of penalties on foreclosure of loans and admits there is no uniformity among banks on

such matters, but appears to have done little to address the problem.


This is reflected in two separate sets of replies to a query under the Right to Information (RTI) Act on the issue of high rates of penalties charged on the prepayment of loans, in a practice followed by private, foreign and state-run banks alike.


"RBI does not approve the policy of charging penalty/fore closure charges," the central bank said in a reply to a query raised by RTI activist Subhash Chandra Agrawal, a resident of Chandni Chowk in the capital's old quarters.


The central bank goes on to add that guidelines have also been issued to commercial banks to ensure usurious interest, including processing and other charges, is not levied on loans and advances.


But in another set of reply, the central bank admits such penalties are, indeed, levied - even by state-run banks.


"Banks, including public sector banks, generally levy prepayment charges on loans as prepayment of loans affect their asset-liability management," says the RBI's reply.


"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."


The replies have left the applicant Agarwal rather clueless.


"While RBI has revealed that it does not approve penalty/fore-closure charges on pre-payment of loans, yet on the other hand it has admitted such a faulty practice prevailing in the banks," he said.


"If RBI does not approve the policy, it should immediately direct banks not to levy any such fore-closure charges," he added.


Source: RBI opposes penalty on loan prepayment, but takes no action- Banking-Banking/Finance-News By Industry-News-The Economic Times

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Feb 3, 2010 RBI


The banking regulator of the country, Reserve Bank of India, does not have any information about “heavy penalties” and “extra-ordinary interest rates” imposed by banks on credit card defaults. In reply to a question “Is RBI aware that banks are charging heavy penalties also in addition to extra-ordinary interest rate on credit card default payments? Statements are deliberately not mailed to earn abnormal interest rates and penalties on payment default” sent through RTI, the bank said it does not have any information.

“We do not have the information,” Thomas Mathew, Deputy General Manager, Reserve Bank of India, said in his reply.

RTI activist S C Agrawal also sought to know, “Is RBI aware that banks impose overlimit charges instead of blocking payment by credit cards beyond their sanctioned limit?” to which the RBI again said it did not have any information.

The RBI, however, said that banks have been advised through a circular dated May 7, 2007 to prescribe a maximum ceiling rate of interest, including processing and other charges, in respect of small value personal loans and loans similar in nature.

“The above instructions are applicable to credit card dues also,” it said while replying on the steps taken by it to have uniform rules regarding penalties and interest rates in regard to credit cards issued by different banks.

The bank, quoting the circular, said, “In case, banks/Non Banking Finance Companies charge interest rates which vary based on the payment/default history of the card holder, there should be transparency in levying of such differential interest rates.”

The RBI said banks should inform the cardholder about the higher interest charged on account of payment or default history.

“For this purpose, the banks should publicise through their web site and other means, the interest rates charges to various categories of customers. Banks/NBFCs should upfront indicate to the credit card holder, the methodology of calculation of finance charges with illustrative examples,” the reply said.

The RBI, however, said as such the maximum interest rate to be charged by banks is left to the discretion of individual banks which is to be fixed with the prior approval of their respective Boards.


Read more: RBI not have info on “heavy penalties” and “extra-ordinary interest rates” imposed by banks on credit card defaults | Tax Guru


Read more: RBI not have info on “heavy penalties” and “extra-ordinary interest rates” imposed by banks on credit card defaults | Tax Guru

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