Prepayment penalty to be charged only on the balance of fixed rate loans: RBI to banks
By Joseph Samson
Jan 24, 2013
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Reserve Bank of India has urged banks to charge prepayment penalty only on home loans which are linked to fixed rates and not on home loans with floating interest rates. According to the monetary regulator's advisory to banks, the prepayment penalty norms have to be revised and should be charged only on the remaining loan amount.

RBI further advises the banks to give greater attention on increasing long term deposits so that more long term loans can be financed, which lessens the burden of Equated Monthly Installments  (EMIs) on borrowers of housing finance.

A report submitted by the committee formed by the central bank to look into the possibility of introducing fixed rate loan schemes of longer tenures by lenders has made several suggestions on this matter. It has said that prepayment penalty should be levied only on the balance of the loan amount which has not been repaid. This directive will enable borrowers to save good amount of funds if they want to prepay a loan based on fixed interest rates.

It should be noted that this decision comes after RBI's previous guideline on doing away with penalty on prepayment of home loans (fixed rate).

Meanwhile, the regulator has also asked bankers to be careful enough not to violate any regulatory norms on base rate.

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