The government may ask for modifications in the prepayment rules to allow a home loan borrower to move to cheaper lenders if his bank increases interest rates shortly after disbursing the loan.
The government wants banks to give a 2 month window to their new borrowers to move to some other bank without prepayment penalty if they have increased interest rates very quickly after disbursement. The finance ministry is expected to take up the matter with the RBI to make these changes.
A top finance ministry official said, “If a bank hike interest rates within a month of the loan taken by a customer, the borrower should also be allowed to look for cheaper options without paying any charges,” and added that charging a prepayment penalty in these cases was similar to a double penalty.
The government is not convinced with banks’ argument that allowing easy foreclosure without any penal charges may lead to asset-liability mismatch.
The official said, “The average maturity of deposits a bank holds is for a period of one and half years. If a loan is prepaid within two months, it will not put any strain”.
It is believed that the RBI will take up the topic with the Indian Banking Association (IBA), and may introduce new prepayment terms including setting the highest and the smallest amount that a bank can charge. An IBA official said, “We’re open to discussion. One should understand that less than 5% borrowers switch loans”.
HDFC Bank charges prepayment penalty of 2% on sum prepaid over 25% of the opening balance. There is no charge if the prepayment is made after 3 years if it is from the borrower’s savings. There is a 6% foreclosure fee on auto loans if the prepayment is made before the end of a year. ICICI Bank levies a 2% of the outstanding principal as prepayment penalty.