Banks unhappy with plan to waive home loan prepayment fine

Written by fe Bureau | Mumbai | Updated: Oct 26 2011, 08:12am hrs
Home loan customers may soon be free to prepay their loans without incurring a pre-payment penalty. A week after the National Housing Bank (NHB) decided to waive the penalty on pre-payment of home loans, the RBI has proposed to ban pre-payment penalties for floating rate home loans.

RBI deputy governor KC Chakrabarty said: The matter is being discussed with banks. They have a few issues relating to the waiver of penalty on prepayment of home loans. We will implement them after ironing them out. Bankers feel the move could cause some mismatch in the assets and liabilities of banks, which is why they have been opposing the proposal.

Typically, customers tend to pre-pay loans at a time when interest rates are going down as their investments in instruments, such as fixed deposits, do not fetch attractive returns. Archana Bhargava, executive director, Canara Bank, acknowledged that while borrowers had a reason to cheer, banks could an face asset-liability mismatch.

Credit growth has been sluggish in the recent times and, therefore, banks may not have many too many avenues to deploy the funds that accrue out of the prepayment of loans, said Bhargava.

SC Sinha, ED, Oriental Bank of Commerce, however, said that there was no dearth of demand for home loans. While there could be some discomfort to banks, in the long term, it would result in better pricing of loans in the marketplace, said Sinha. Banks will price their products in such a way that they neither under-charge nor over-charge, he explained.

SS Mundra, ED, Union Bank of India, said that as move was imminent, industry had already factored it in. We are inclined to believe that banks should not charge (for prepayment) for the floating rate loan products. But for fixed rate loans, we would need to ask customers to bear a charge because, otherwise, there could be an asset-liability mismatch. Bankers plan to take up the issue with the IBA.