Home loan foreclosure fees hurt clients, competition: CCI probe

Written by Sitanshu Swain | Mumbai | Updated: Jan 29 2011, 07:36am hrs
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In a move that will cheer millions of housing loan customers, an investigation report of the Competition Commission of India has favoured scrapping foreclosure charges on housing loans, which it feels obstruct competition in the banking industry. Levying foreclosure fees is both anti-consumer and anti-competitive, a CCI report said.

The report prepared by the CCI following complaints from customers of ICICI Bank, Citibank and BHW Home Finance (which has been acquired by Dewan Housing) has come to the conclusion that the practice of slapping foreclosure charges is anti-competitive and violates the provision of Competition Act. 2002.

The competition watchdogs probe report is in sharp contrast with its ruling last December in a similar case, where the complainant alleged that Deutsche Post Bank Home Finance violated the Act by imposing penalty on prepayment of home loan. The CCI then said that no bank or housing finance company operating in the Indian market can be deemed to be in a dominant position so as to attract the clause of abuse of dominant position. Neither are they following uniform practices to suspect an anti-competitive agreement among them, the commission had said.

But the latest probe report, a copy of which was seen by FE, said: The move on the part of banks is anti-competitive as levying of prepayment penalty not only hinders free movement of borrowers from one bank to another but also acts as a barrier to new entrants in the market who are providing loans at a competitive/ lower interest rates, better services to the borrowers. (The practice) is found to be in violation of Section3(1) read with Section3(3) (b) of the Competition Act 2002.

The Commission was supposed to complete its formalities on January 27 for delivering the judgment on whether the charges affect competition. With ICICI Bank seeking more time to file a response, the judgment has been deferred to February 15.

Though FIs often cite asset liability management to justify foreclosure fees, a CCI probe of the internal circulars and operating guidelines of these institutions revealed that the actual intention was not ALM but to make exit expensive and prevent borrowers from switching lenders.

The CCI report mentions the Indian Banks' Association circular which had left it to the banks to decide whether to slap foreclosure charges or not. The circular, says CCI, had considered charges in the range of 1-5% reasonable.

It is noted from the meeting of IBA that the group of banks have come together and have taken a collective decision to limit market competition and generate fee-based income, the CCI report said. Coming down heavily on banks, CCI said the collective decision might be beneficial to banks, but on the contrary, is anti-consumer and anti-competitive. According to CCI, these charges prevent the borrower from freely exercising his right to choose the best terms and conditions and the service provider.

During the course of investigation, CCI found that Axis Bank doesnt levy prepayment charges. The bank explained to the CCI that the floating rate of interest is linked to a single benchmark rate known as Mortgage Reference Rate (MRR) which is calculated after considering the cost of funds, cost of operations and provisioning requirements. The floating rate of interest is at a discount to the benchmark MRR. Once the loan is disbursed/sanctioned, the discount remains constant.

The strategy of passing on the equal impact of benchmark reference rate change to all home loan borrowers with floating rate of interest has enabled the bank to position itself as a bank which maintains parity between existing and prospective customers and therefore reduce prepayments, explained Axis Bank.

It is inferred from Axis Banks submission that the bank fairly distributes the impact of interest rate movements among borrowers, which helps in reducing pre-payments. The bank focuses on reducing overall prepayment, instead of focusing more on recovering the prepayment charges.

The final CCI order is expected to highlight whether such prepayment charges create barriers to new entrants in the market, drive existing competitors out of the market, prevent competition by hindering entry into the market and prevent accrual of benefits to consumers.

The order could touch upon larger economic issues like whether improvements in production or distribution of goods or provision of services and promotion of technical scientific and economic development by means of production or distribution of goods or provision of services will be adversely affected by allowing foreclosure charges on housing loans.