Prepayment penalty of home loans likely to go

Finally, after initial resistance, lenders have started to waive the prepayment penalty in home loans. The banks used to levy penalty on the customer that borrowed money from some other lender to make the prepayments. However, such a penalty was not applicable to a customer who is making prepayments solely through his own resources.

The Reserve Bank of India was never in favor of this practice which was followed by majority of the lenders. Setting an example for the other lender, the largest lender in the country State Bank of India earlier has waived the penalty for the new customers and now has exempted the existing customers from the penalty.

“Banks have already agreed, but they are not issuing the guideline (to their branches) that you cannot charge prepayment penalty. We are not clear why banks charge the prepayment penalty,” said Mr. K C Chakrabarty, Deputy Governor of RBI.

The Chairman and managing Director of Punjab National Bank, Mr. K. R. Ramath said “If the regulator ultimately wants it, we need to fall in line. The prepayment penalty is not an avenue for bankers to make money, but a mechanism to recover costs due to mismatch in assets and liabilities. If RBI feels we have to do away with that, as bankers we will have to find a way to recover the cost.”

Some other public sector banks including Bank of India, Indian Bank and United Bank of India have also waived prepayment penalty on floating rate retail loans and more lenders are expected to joint the group soon.