Banks levying charge on pre-payment
For people who take loans from banks, there is always an urge to try and get rid of the loan early. I know a number of colleagues and friends who have taken loans to buy properties, and once they have taken a loan, there are always trying to use excess money that they have to try and reduce the amount of loan amount outstanding, and there are a number of them who pay off the money long before the final EMI is due. Banks really don’t like prepayments too much; if you are a customer who has the credit rating to retain the loan amount till the end, they would rather encourage you to pay the regular EMI’s. Banks have a loan portfolio, and a certain balance in terms of accounting for regular loan repayments. It disturbs this short term and long term money and funds forecast of the bank if their customers start pre-payment, and hence banks charge a fee for pre-payment.
A few days ago, the RBI had apparently sent a reply under RTI that it did not really approve of banks charging a penalty for pre-payment; the latest clarification was meant to even remove this statement. The RBI is stating a more hands-off policy, since these are private banks with their own management; apparently the RBI expects that market competition is enough to ensure that banks do not heavily over-charge, and that they should not charge customers more than their standard rates (link to article):
According to RBI, while banks have the freedom to levy service charges on all matters pertaining to banking transactions, including pre-payment/ foreclosure of loans, banks are required to ensure transparency in displaying information regarding such charges.
RBI said it is expected that freedom given to banks will foster healthy competition amongst banks to keep service charges at reasonable levels, which would ultimately benefit customers. It said, banks generally levy charges for foreclosure of loans as it adversely impacts their asset-liability management.
At the same time, one expects that the RBI will get involved if banks start collaborating to recover standard charges from customers.
January 18th, 2010 at 8:08 am
DHFL is asking me to pay a penalty of 2% on pre-payment of my Housing Renovation Loan. Please suggest the course of action. Should I approach Consumer court on the subject.