The Telegraph
Thursday , May 8 , 2014
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Prepayment penalty breather

Mumbai, May 7: The RBI today directed banks not to levy any penalty on the prepayment of loans taken on floating interest rates.

“It is advised that banks will not be permitted to charge foreclosure charges or prepayment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,” the RBI said in a notification.

Floating loan products include housing and auto loans.

In the first bi-monthly monetary policy statement for 2014-15 announced in April, the apex bank had asked lenders to consider allowing their borrowers to prepay floating rate term loans without any penalty.

Some banks charge prepayment penalty of up to 2 per cent of the outstanding loans.

This is not the first time that the central bank is cracking down on such a practice. Two years ago, the RBI had barred banks from levying prepayment penalties on floating rate home loans.

The RBI had then said the move would lead to a reduction in the discrimination between existing and new borrowers and the competition among banks would lead to a finer pricing of the floating rate home loans.

Prior to its direction, many banks had voluntarily abolished prepayment penalties on floating rate home loans.