Bankers unhappy with waiver of preclose penalty on home loans
By Joseph Samson
Mar 24, 2011
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The finance ministry of India has directed banks to waive of preclosure penalty charges on home loans. The directive has however not made bankers happy and they are reluctant over its implementation.

The ministry gave this direction in a meeting of public sector banks as well as the Indian Banks Association (IBA).

"I have certain liability to commit during the tenure of the loan, and hence, I need some additional money to compensate in case the account was getting closed beforehand," said KR Kamath, CMD of Punjab National Bank thereby showing disconsent to the move.

MD Mallya, CMD of Bank of Baroda said that such a move can be thought of only when a bank has strong liquidity position and huge surplus in hand.

"However, we can't waive off penalty fees if we come to know that the foreclosure was being done only for the sake of shifting the account to some other bank," Mallya added.

According to M Narendra, CMD of IOB, "In case of larger home loans being foreclosed, it becomes an issue of asset-liability mismatch (ALM) for the bank as we have to find alternate sources for the deployment of such funds. Hence, it makes sense to charge penalty. Still, I do believe that there must be transparency in pre-payment charges being imposed by various banks."

TM Bhasin, CMD of Indian Bank placed his view saying that the decision to levy foreclosure charges was taken when demand for loans in the country was slow. But the current situation is different and there is a huge upsurge in demand for credit.

"So, I won't mind if some of my borrowers want to shift their loans. I mean, we are already offering competent rate of interest for our loans. Still, if any lender is ready to offer an interest rate, which is even less than his bank's cost of deposit and thus is ready to spoil one's balancesheet, then I have no issue," Bhasin said.

"Whether the borrower is going for foreclosure of his home loan from his own cashflows is one of the factors we look at while finalising the pre-payment penalty," said VR Iyer, executive director of Central Bank of India.


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