Prepayment penalty guidelines after IBA comments, says RBI

Written by fe Bureau | New Delhi | Updated: Sep 28 2011, 06:18am hrs
The Reserve Bank of India (RBI) has said that the Indian Banks Association (IBA) is likely to give its views on the proposal to remove prepayment charges on floating loans by the end of this month, following which the RBI would come out with a guideline.

RBI chief general manager and banking ombudsman (New Delhi) M Rajeshwar Rao said that after receiving comments from the IBA, a final decision will be taken by the RBI. Earlier this month, the banking ombudsmen conference suggested that banks must not recover pre-payment charges in floating rate loans.

Following this, the National Housing Bank (NHB) had said that it will soon come out with a directive to abolish penalty on prepayment of floating loans given by housing finance companies as well.

Removal of prepayment charges would bring fairness in bank charges. The penalty levied in some banks ranges between 1% and 5% on the loan due, which varies on different kinds of loans. The banks will, however, be free to recover or charge appropriate prepayment penalties in the case of fixed rate loans.

According to Rao, 98% loans given by banks come in the floating rate category.

The Banking Ombudsman Scheme of the RBI deals with deficiency in the services by a bank and 27 services are part of the scheme.