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RBI removes prepayment penalty on home loans

The removal of prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers

June 06, 2012 10:31 IST | India Infoline News Service
The removal of prepayment penalty on home loans would reduce discrimination between existing and new borrowers
On 5th June, the Reserve Bank of India (RBI) announced removal of prepayment penalty on home loans with floating interest rates.
According to RBI, home loan borrowers across the board resented foreclosure charges levied by banks on prepayment of home loans.
“This is 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,” the RBI said.
“As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source,” the notification said.
The central bank said, “Removal of 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 had in the recent past voluntarily abolished prepayment penalties on floating rate home loans, there was a need to ensure uniformity across the banking system, the statement said.
“It has, therefore, been decided that banks will not be permitted to charge prepayment penalties on home loans on floating interest rate basis, with immediate effect,” it said.

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