Home Loan Interest Rate: Can bank charge extra if construction not completed?

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Updated: December 28, 2019 11:20:41 AM

Home Loan Interest Rate: A commercial bank cannot charge any extra interest, which is not mentioned in the loan agreement or the loan sanction letter, according to a recent order of the National Consumer Disputes Redressal Commission (NCDRC).

Home Loan Interest RateCan bank charge rate not mentione din home loan agreement? Representational image

Home Loan Interest Rate: A commercial bank cannot charge any extra interest, which is not mentioned in the loan agreement or the loan sanction letter, according to a recent order of the National Consumer Disputes Redressal Commission (NCDRC). The order came in a case where a public sector lender had charged “commercial interest” on a home loan because the construction was not completed within three years. However, the charging of commercial interest on failure to complete construction within three years was not mentioned in the loan agreement.

The respondents in the case had taken a home loan from the petitioner bank, which charged an extra 1.5% as commercial rate of interest as per its circular dated 01.10.2016. The respondents repaid total loan amount even before the expiry of the total period of loan and the bank accepted repayment without any charges for early repayment.

The respondents later filed a consumer complaint in District Forum, claiming the bank was not entitled to charge commercial rate of interest on the sanctioned home loan. The District Forum allowed the complaint and directed the bank to refund the extra amount. The bank later approached the State Commission, which dismissed the lender’s appeal. The bank then approached the NCDRC.

What NCDRC said

Before the National Commission, the bank said that the commercial rate of interest was charged as per master circular which became effective from 01.04.2016 issued by the bank’s head office. “In case the borrower fails to complete the construction of House within a period of 3 years from the availment of Home Loan, Branch to charge commercial rate of interest [1 year MCLR + Strategic Premium plus maximum band or Base Rate Plus maximum band (if loan is under base rate system), as the case may be, declared by the Bank for commercial purpose prevailing at the time of default] from the date of first disbursement,” the circular said.

“… it is clear that there were clear instructions that the branches were authorised to charge commercial rate of interest if the construction was not made within three years, however, the branches were also advised to incorporate suitable covenants in the loan documents. In the present case, it is seen that neither in the loan sanction letter dated 30.04.2012 nor in the loan agreement dated 30.04.2012 there is any clause mentioning that if the construction is not made within three years, the commercial rate of interest will be charged,” the National Commission said.

The NCDRC dismissed the bank’s petition while noting, ” The fact is that there is no mention of charging commercial rate of interest in the loan agreement or in the loan sanction letter, therefore, the agreed rate of interest i.e. 12.25% has not been disturbed either by the District Forum or by the State Commission. Thus, in the present case, there is no question of violation of Section 21 A of the Banking Regulation Act.

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However, the loan was sanctioned in 2012 and the loan agreement did not mention anything mentioned in the circular, the NCDRC noted.

Section 21 A of the Banking Regulation Act provides that courts cannot interfere in respect of the interest being charged by the bank on the ground that interest is excessive.

When commercial purpose can be considered

Also, as per the National Commission, commercial purpose in case of booking of more than one plot/flat can be be understood only if the loanee is a regular trader of plots/flats and earns profit from these transactions.

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