MUMBAI: Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness.
"Banks must not recover pre-payment charges in floating rate loans," the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference.
"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk."
The levy of pre-payment penalty by banks has been criticised by consumer groups and the regulator, since it deprives an individual the choice to end the debt burden. Banks have been using it to prevent customers from shifting loyalty and manage their asset-liability gaps.
A committee headed by former Securities and Exchange Board of India chairman M Damodaran had suggested actions to improve customer service, including a ban on the practice.
"RBI's decision is a very good thing since it will encourage people to settle their outstanding loans faster," said Jehangir Gai, joint secretary, Consumer Welfare Association in Mumbai. "It is usually a hidden charge and banks do not disclose it to the consumer. When the consumer goes to close a loan, banks spring this charge as a surprise.''
The annual Banking Ombudsman Conference also directed banks to come with a consensus view on the recommendations of the panel that could be implemented immediately. The Ombudsman scheme was introduced in 1995 to settle consumer disputes quickly in an inexpensive way.
BANKS SHOULD PROVE INNOCENCE
"Banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that the customer is not denied the 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," the Damodaran committee said.
The Ombudsman conference also decided that banks will have to prove that the fault is not theirs in disputes over automated teller machines and internet transactions. RBI will consider whether a customer is to be compensated for the agony suffered during a dispute.
Other recommendations of the Damodaran committee include an end to discrimination among retail borrowers, uniform charge for mortgages with similar risk profile, and not penalising those presenting a cheque in case it bounces, but compensating them in the event of wrong returns.
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