The Reserve Bank of India (RBI) is likely to order banks to scrap penalty on pre-payment of all retail and small corporate loans and also scrap fines for failure to maintain minimum balance. Statically, about a quarter of bank loans are retail loans while the share of small and medium enterprise loans is about 15%.
According to RBI, there is no rationale for banks to levy such kind of prepayment charges on any loan since the entire system has been moved to floating rates, where rates are charged based on the prevailing markets. It is in view of this, that the central bank had advised lenders to stop levying such penalties.
Furthermore, banks also were understood to have discriminatory approach between retail and big corporate clients, with the latter enjoying the benefit of lower interest and no pre-payment penalty clause simply because of their sheer size. However for retail, citing costs, domestic banks charge between half and four percentage points of outstanding loans if customers attempt to pre-pay mortgage, while the charges for non-maintenance of minimum balance vary between Rs 500 and Rs 2,000.
However, this is not for the first time that the banks and the sector regulator may be loggerheads. Three years ago, the RBI had directed banks not to charge any penalty on prepayment of home loans, after a similar nudge did not work. Nevertheless, banks continued to charge pre-payment penalty on other floating rate loans products such as education, personal and car loans.