The Reserve Bank of India (RBI) on Tuesday announced that banks will not be allowed to charge foreclosure charges and pre-payment penalties on home loans, thus enabling borrowers to foreclose any loan account without being penalised for pre-payment.
The RBI said the Committee on customer service in banks observed that foreclosure charges levied by banks on pre-payment of home loans are opposed by home loan borrowers across the board, mainly because banks were hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. It also said foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper loans.
The central bank is of the view that removal of foreclosure charges/pre-payment penalty on home loans will lead to reduction in discrimination between the existing and new borrowers.
This will also lead to more competition among the banks, resulting in better pricing of the floating rate home loans.
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