No charges on foreclosure of home loans to be a reality

Mon Sep 12 2011, 00:55 hrs- IndianExpress


Sudhakar Raj, a former bureaucrat, took voluntary retirement and decided to buy a house in his hometown, Hyderabad. Since his salary account, fixed deposits and savings were with the State Bank of India (SBI), RK Puram branch, New Delhi, his natural choice to go for a home loan was SBI.

The loan contract mentioned that “A pre-closure charge of 2 per cent of the amount prepaid in excess of normal EMI dues will be levied in respect of pre-closure of loan within 3 years from the stipulated date of commencement of repayment. If the loan is pre-closed from own resources other than borrowings, for which proof is submitted to the satisfaction of the bank, pre-closure charges shall not be levied irrespective of the period for which the loan account has run.” Based on his past relationship with the bank and the trust he had in SBI, he applied and got the home loan in July, 2010. 

 However, little did he know that he would end up paying a huge charge of Rs 45,309 at the time of pre-payment, next year. “Since my fixed deposits with the SBI matured and I had enough bank savings, I decided to repay my home loan this year in July. However, to my horror, an amount of Rs 45,309 was deducted as a foreclosure charge. When I inquired, the branch manager said he is not convinced whether the amount repaid is from my own sources or not,” says Raj.

Since the pre-payment was made from the FDs and savings with the same branch, the question of own sources did not arise, believes Raj. After that started the horrendous experience of writing letters and emails to the bank, which went unanswered. Finally, last month he filed an RTI in SBI and is still waiting for the reply even after 28 days out of the 30 day deadline has passed. An email sent to SBI, by The Indian Express, went unanswered. Raj, is one among lakhs of people who go through the tiring process of home loan and many times suffer at the hands of various lenders.
Own sources

Almost all lenders have some or the other clause mentioning “repayment through own sources”, in their respective home loan contract. “The respective branch manager should be convinced about the source of the funds through which a borrower is repaying a home loan,” said a senior Bank of Baroda official. “There is no clear definition of what constitutes ‘own sources’. If a person is repaying from his/her bank account through a cheque, there is no need for further investigations by the lender. It results in harassment of a borrower if the respective branch manager is not convinced,” says Harsh Roongta, CEO, Apnapaisa.

Prepayment charges

National Housing Board, issued a circular last October, applicable on housing finance companies like LIC Housing Finance and HDFC, wherein it said, “Pre-payment levy or penalty should not be collected from the borrowers when the housing loan is pre-closed by the borrowers out of their own sources. All HFCs are advised to ensure compliance of the above with immediate effect. Please note that non-compliance with the above advisory may attract penal consequences under the National Housing Bank Act, 1987.” However, surprisingly banking sector regulator RBI is lagging behind NHB as far as guidelines on prepayment penalty is concerned as there is no rule by central bank that says that banks cannot charge foreclosure charges. There are some banks that do not charge any foreclosure charge, if it is done through one’s own sources. However, ICICI bank, country’s largest private sector bank, charges 2 per cent plus service tax as foreclosure charge on the outstanding amount of loan.
In an indication, which suggested that RBI is mulling scrapping the prepayment charge altogether, whether from own sources or through re-financing. RBI, at the recent Annual Conference on Banking Ombudsmen suggested that banks need not impose any charges for pre-paying loans taken under floating rates by customers. “Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it, to borrowers and, thus, banks only substitute interest rate risk with potential credit risk,” the Ombudsman noted. Though it has come as only a suggestion, banks normally accept RBI suggestions. Toeing the RBI line there was an immediate reaction from NHB chairman and managing director, RV Verma, who said, “We are in discussion with the housing finance companies and would soon bring guidelines to remove prepayment penalties on all account. There has to be a level playing field and lenders cannot restrict borrowers in a competitive market”.

A committee chaired by former Sebi chief, M Damodaran, had suggested in its report said banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that customer is not denied of opportunity to enhance his economic welfare by making choices such as switching to other banks/ financial entities to enjoy the benefits conferred by market competition.
Customers to benefit

Zero prepayment/foreclosure charges would come as a good news for the borrowers. This means that, whenever implemented, a customer can shift/refinance existing home loan from one lender to another without attracting any penalty, by prepayment. This is also a prudent move, for fresh loans are charged at 10.5-11 per cent, but existing loans taken two years ago have crossed 12 per cent. If your existing loan is charged at 11 per cent interest, it is best to break FDs earning 8-9 per cent to prepay the loan.

However, people like Raj feel helpless when despite the contract, they are penalised.

“Such customers should not lose their morale. They must send a copy of all the communication with their bank along with a copy of the home loan documents to the Banking Ombudsman and demand compensation,” suggests Roongta. Detailed information is available on www.bankingombudsman.rbi.org.in against the banks, and at www.nhb.org.in against the housing finance companies.

Even as it is a salutary development, it is yet to be seen whether the lenders devise some other way, like increasing the processing fee, to cover their risk in the form of costs incurred in foreclosure cases. Experts believe that NHB and RBI must make their grievance redressal mechanism more robust and till they do away with the foreclosure charges completely, should come out with clear definition of “own sources of funds” which will help customers take a prudent decision.