RBI cautioned banks for prepayment and floating rate manipulations

28 Oct 2011 Evaluate

The Reserve Bank of India has warned banks for taking customers for granted by manipulating interest rates on the floating rates loans. The Apex bank also wants banks to voluntarily waive the prepayment penalty on home loans.

However, Banks and RBI both mutually agreed to outlaw prepayment fees on floating rate home loans as one the 10-point action to improve customer services. KC Chakrabarty, deputy governor of RBI said 'Banks had agreed...now they have a problem. We are giving them some time but we are very clear that this 10-point action plan has to be implemented,'

Many banks are charging around 2% of the outstanding loans if the borrower wants to repay before the due date. However, leading commercial banks from public and private sector such as State Bank of India and Axis Bank have stopped charging prepayment fees.

The RBI governor D Subbarao also had indicated that the RBI will pursue banks to waive off the prepayment penalties as soon as possible. However, he also hinted that the banking system should get time to adjust with this, and RBI will give banks some time for adjusting.

At the same time, the RBI in its mid-year monetary policy review has expressed its discomfort about old floating rate customers getting a raw deal whereas new customers are offered a better rate; however, both have got the same rating. In a statement, the RBI said that there are instances where the spread charged to a customer has been revised upward frequently during the tenure of the floating rate loan.

The RBI find this practice as discriminating in nature as the existing customer are at disadvantage compare to the new customer with the same credit rating. Especially in case of home loans where banks kept offering attractive rates to new customers whereas old customers pay a higher rate.

To bring uniformity in differential rates RBI said that it is setting up a working group which will look into the 'principles governing proper, transparent and non-discriminatory pricing of credit.'

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