RBI may ask banks to bury pre-payment fine
The Reserve Bank of India (RBI) plans to direct banks to stop levying penalty on pre-payment of retail loans, heeding to a
long-standing demand of borrowers availing of floating rate loans who find benefits of periodical interest rate cuts eluding them. ( Watch )
“The right to avail of loans at lower rates of interest should not be curtailed by prepayment penalties. We will direct banks to do away with the prepayment penalty in case of loans disbursed in future,” said an RBI official. However, the banking regulator is yet to decide on whether this benefit should be given to existing borrowers, he said, requesting anonymity.
Currently, banks and institutions levy prepayment charges of 1-4% on refinancing of home, auto and personal loans. However, prepayment using own funds do not attract penalties in most case.
This move will lead to greater competition in the retail segment and result in the convergence in interest rates offered by various lenders, as borrowers will be able to refinance expensive loans with cheaper credit without attracting any penalty.
Source - economictimes.com
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