Prepayment penalty on personal, car loans gone

Tags: News
Have surplus cash? Pay up your existing loan. You can now prepay any floating rate term loan without paying a penalty to your bank.

The Reserve Bank of India (RBI) on Tuesday abolished foreclosure charges or prepayment penalty on all floating rate term loans for individuals.

Home loan, car loan, personal loan, education loan and loan against property would fall in the category of floating rate term loans. Similar penalties on the prepayment of floating rate home loans were eliminated in June 2012.

Bankers said the norms would not have any significant impact on profitability.

SL Bansal, chairman and managing director of Oriental Bank of Commerce (OBC), said: “Most personal loans are floating rate loans. Therefore, customers will benefit.”

“Since home loans are already in the exempted category, the impact on profitability and asset-liability mismatch in the remaining retail portfolio would be marginal,” said Bansal. He estimated OBC’s retail loan portfolio at 7-8 per cent of total advances.

Some other banks said they might need to reprice certain products.

“It is advised that banks will not be permitted to charge foreclosure charges/ prepayment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,” the RBI notification said.

An official with a private sector bank said the move would impact fee income and lenders would have to reprice their individual portfolios.

Prepayment penalties vary across banks and can be as high as 4 per cent of the outstanding loan. Prepaying a loan is the best option for a borrower, as it saves interest outgo. The longer the tenure of a loan, the more interest you pay.

On Tuesday, RBI asked banks not to levy penalties on customers who do not maintain a minimum balance in any inoperative account.

In its first bimonthly monetary policy statement on April 1, the central bank had proposed a ban on prepayment penalties. “Consumer protection is an integral aspect of financial inclusion. The Reserve Bank of India proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing borrowers the possibility of prepaying floating rate term loans without any penalty,” the RBI statement said.

Post new comment

E-mail ID will not be published
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.

EDITORIAL OF THE DAY

  • India’s festivals teach us to share our wealth and joy

    India is an aporia in its own true sense.

FC NEWSLETTER

Stay informed on our latest news!

INTERVIEWS

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs

Chander Mohan Sethi

CMD, Reckitt Benckiser India

COLUMNIST

Tushar Gandhi

Sustainable model for rural sanitation

Prime minister Narendra Modi has promised to build a toilet ...

Zehra Naqvi

How smells evoke strong memories

Remember that time when a passing fragrance transported you to ...

Dharmendra Khandal

Indian zoos need a fresh approach

Recently, when a man jumped in a tiger trench of ...

INTERVIEWS

William D. Green

Chairman & CEO, Accenture