RBI finally abolishes pre-payment penalty

RBI has directed all banks not to charge any prepayment penalty on home loans as per the following circular.
RBI/2011-12/589 DBOD. No. Dir. BC.107/13.03.00/2011-12 dated 5.6.2012.

Clause 81 to 83 are attached of Monetary Policy 2012-2013 released on 17.04.2012.

81. The Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board, especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.
82. It is felt that the removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate. Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard. Accordingly, it is proposed:not to permit banks to levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.
83. Detailed guidelines in this regard will be issued separately.

CONCLUSION
The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans. Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.

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