Mumbai: The Reserve Bank on Friday directed state and central co-operative banks to stop levying penalty on pre-payment of home loans on floating interest rates with immediate effect.

" has been decided that banks will not be permitted to charge foreclosure charges /pre-payment penalties on home loans on the floating interest rate basis, with immediate effect," RBI said in a notification.

Earlier this month, RBI had also asked the commercial banks to stop charging such penalties.

RBI said the removal of foreclosure charges or pre-payment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans.

"Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system," it said.

RBI in its monetary policy for 2012-13 had proposed that banks should not be permitted to levy such charges with a view to bring uniformity across the banking system in the home loan segment.
The committee on Customer Services in Banks under M Damodaran had expressed that foreclosure of charges levied by banks on prepayment of home loans was resented upon by home loan borrowers and the banks were hesitant in passing on the benefit of lower interest rates to existing borrowers in a falling interest rate scenario.

"As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source".


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