THE government may seek changes in the pre-payment rules to enable a home loan borrower to shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan. The government wants banks to provide a two-month window to their new borrowers to shift to some other bank without prepayment penalty if they have raised interest rates too quickly after disbursement. The finance ministry is likely to take up the matter with the central bank to seek these changes.
"If a bank hike interest rates within a month of the loan taken by a customer, the borrower should also be allowed to look for cheaper options without paying any charges," said a senior finance ministry official adding that levying a pre-payment charge in such cases was like a double penalty.
The government is not convinced with banks' argument that allowing easy foreclosure without any penal charges may lead to asset-liability mismatch. "The average maturity of deposits a bank holds is for a period of one and half years. If a loan is pre-paid within two months, it will not put any strain," the official said.
It is expected that the banking regulator will discuss the issue with the Indian Banking Association (IBA), a body of all commercial banks, and may come up with new pre-payment norms including fixing the maximum and the minimum amount that a bank may charge. "We're open to discussion. One should understand that less than 5% borrowers switch loans," an IBA official said.
Pre-payment charges differ across the industry. While private sector banks charge the customer a steep 2% on the principal outstanding, some public sector banks charge as low as 1% when transferring loan from one bank to another. If any prepayment is made within three years of the first disbursement, HDFC Bank charges an early redemption fee of 2% on amount prepaid in excess of 25% of the opening balance.
"No charges if the prepayment is made after three years of the loan if it is from your own savings," stated the bank in an e-mail reply to ET query. The bank charges 6% foreclosure fee on auto loans if the pre-payment is made within a year of disbursement. Private lender, ICICI did not respond to an e-mail send by ET. Its website says that pre payment charge levied is 2% of the principal outstanding at the time of foreclosure and amount paid excess of the monthly instalment in the last one year. The bank allows part pre-payment.
The Competition Commission of India (CCI) had earlier sought replies from all banks after receiving complaints from loan borrowers, asking why prepayment penalty should not be held as anti-competitive practice.
