Reserve Bank of India on Friday (August 02, 2019) reminded all the commercial banks that they are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all floating rate term loans sanctioned to individual borrowers. The above norm of prohibiting banks charging foreclosure charges/pre-payment penalties on floating rate loan is already in existence since 2012. The Banking regulator time and again reminding banks in view of complaints received by it on levy of foreclosure charge or pre-payment penalty on home loans.
The Committee on Customer Service in Banks (Chairman: M. Damodaran) had observed that foreclosure charges levied by banks on prepayment of home loans are resented upon by home loan borrowers across the board especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the 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 the cheaper available source.
The Reserve Bank communique in this regard states that removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans.