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.

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