The Competition Commission of India (CCI) has initiated an investigation on the practice of lending institutions charging prepayment penalties on loans extended by them. The investigation has been launched after a complaint filed by an individual who was charged a prepayment fee by LIC Housing Finance (LICHF).

The Commission’s probe comes barely a week after RBI voiced its disapproval over banks levying prepayment charges on loans.

Neeraj Malhotra, the complainant, told Financial Chronicle that he took a LICHF loan in 2004. However when he wanted to repay the amount in bulk, he was charged a penalty at 1.5 per cent.

Malhotra has sought that the commission direct banks to discontinue the practice of levying prepayment charges and be penalised to the extent of 10 per cent of their average turnover for the last 3 preceding financial year.

A senior official of the commission said that based on the complaint, the issue was taken up in meeting held on September 19, which was chaired by Dhanendra Kumar, chairman of the commission.

In the meeting, “It has been decided that the case will be taken up and we alerted the director general to conduct a thorough investigation into it,” he said. K K Sharma, director general of the commission declined to comment.

When contacted, R R Nair, chief executive officer of the LIC Housing Finance declined to comment on the specific case but gave details of the rationale for the lender to impose such charges. “When we give out a loan, it is based on an expectation that it will continue for a reasonable amount of time and we factor in our cost based on that assumption. But if it is prepaid we will not be able to realise that cost.”