Prepayment penalty on home loans on way out, RBI indicates

Borrowers wanting to prepay home loans can look forward to some relief as RBI today indicated that it would scrap prepayment penalties charged by banks.

"It is proposed to implement the recommendations of the Damodaran Committee, on which a broad consensus has emerged, as also the action points which were identified by the IBA (Indian Banks' Association) and BCSBI (Banking Codes and Standards Board of India) in the last Banking Ombudsmen conference," RBI said in its mid-year credit policy review.

The Banking Ombudsmen at their conference in September recommended abolition of pre-payment charges on home loans taken under floating rates by customers.

Banks may also offer long-term fixed rate housing loans to customers, Ombudsmen had suggested. They also said lenders may address their asset liability mismatch (ALM) issues by taking recourse to interest rate swaps (IRS) market.

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 Ombudsmen noted.
Damodaran Committee which was set up by the RBI suggest improvement in banking services had also suggested removal of pre-payment charges.

Some of the private sector lenders charge up to 2 per cent of outstanding loan on foreclosure.
Public sector banks by and large do not levy any prepayment charges when the amount is paid by borrowers from their own sources.

The National Housing Bank (NHB) has already directed all housing finance companies to desist from imposing a prepayment penalty on home loan borrowers.