The levy of a penalty by banks and housing finance companies for foreclosure of home loans does not amount to abuse of dominant position, the Competition Commission of India (CCI) ruled on Tuesday, quashing borrowers’ hopes that the practice could be abolished.
Hearing a complaint filed by one Neeraj Malhotra over such charge being levied by Deutsche Post Bank Home Finance Ltd, the competition watchdog ruled that banks and housing finance companies were not violating competition laws by charging the penalty. The levy, according to the CCI, neither amounts to an anti-competitive agreement, nor abuse of dominant market position.
“It is evident from our analysis and determination of these issues earlier in the order that there is a vibrant market in provision of home loans, with the number of service providers and the variety in products growing consistently and continuously over a period of years,” the CCI said in its order.
There is no bank or housing finance company in the market that can be deemed to be dominant based on the parameters used for determining such practices. The question of abuse of dominance, therefore, does not arise.
It is equally clear that there is no agreement among the various service providers—banks or housing finance companies – nor is there any uniform practice being followed by them. They are operating as competitors in a vibrant competitive market, the CCI said in the order posted on its website.
Major players : As per an ICRA report dated June 17, 2010, the major players in the home loan market as of March 31, 2010, were HDFC, with a 17% share of the market along with HDFC Bank; State Bank of India (17%), ICICI Bank (13%, including ICICI Home Finance); and LIC Housing Finance (8%). These players together accounted for 55% of the total home loans business in the country.
Apart from these big players, there are some housing finance companies with relatively smaller credit portfolios operating in areas not yet covered by larger companies or serving niche customers. These small companies have witnessed rapid growth of their portfolios over the past few years.
Among the banks that were asked to give their views on the complaint against the levy of a foreclosure penalty were State Bank of India (SBI), ICICI Bank Ltd , Axis Bank Ltd , Punjab National Bank (PNB), Canara Bank , Indian Overseas Bank (IOB), Indian Bank , Oriental Bank Of Commerce (OBC) and HDFC Bank Ltd , amongst others. Home financiers like Housing Development Finance Corp Ltd (HDFC) and LIC Housing Finance Ltd were also served notices by the CCI.
Many of these institutions made it clear before the CCI that removal of the prepayment penalty would result in a higher lending risk for bankers and could result in an asset-liability mismatch.
At present, most banks charge a prepayment penalty of around 1-2% in the event of a customer opting to close a home loan prematurely. Banks do this with a view to cover the interest loss due to foreclosure of the loan. The CCI’s ruling quashes hopes of thousands of borrowers to foreclose on their housing loans without paying a penalty. If the penalty was lifted, it would have led to a flood of borrowers’ refinancing their loans through lenders offering lower interest rates.
Legal perspective :- “From a legal perspective, it is pertinent to note that the CCI can and has emphatically overruled the Director-General, the investigative limb of the CCI, which in this case had found a contravention of section 3 of the Act.
Positive message :- This decision sends a positive message to business and industry and will help instil their confidence in the CCI,” said Ms Pallavi Shroff, Head, Amarchand Mangaldas’ Competition Practice. Amarchand Mangaldas represented HDFC Ltd, in the case.