The Reserve Bank of India (RBI) does not approve of penalties on foreclosure of loans and admits there is no uniformity among banks on such matters, but appears to have done little to address the problem. This is reflected in two separate sets of replies to a query under the Right to Information (RTI) Act on the issue of high rates of penalties charged on the prepayment of loans, in a practice followed by private, foreign and state-run banks alike.

“RBI does not approve the policy of charging penalty / foreclosure charges,” the central bank said in a reply to a query raised by RTI activist Subhash Chandra Agrawal, a resident of Chandni Chowk in the capital’s old quarters.

The central bank goes on to add that guidelines have also been issued to commercial banks to ensure usurious interest, including processing and other charges, is not levied on loans and advances.

But in another set of reply, the central bank admits such penalties are, indeed, levied – even by state-run banks.

“Banks, including public sector banks, generally levy prepayment charges on loans as prepayment of loans affect their asset-liability management,” says the RBI’s reply.

“There is no uniformity in the practice followed by various banks as the banks have been given freedom to fix service charges for various types of services rendered by them.”

The replies have left the applicant Agarwal rather clueless.

“While RBI has revealed that it does not approve penalty / fore-closure charges on pre-payment of loans, yet on the other hand it has admitted such a faulty practice prevailing in the banks,” he said.

“If RBI does not approve the policy, it should immediately direct banks not to levy any such fore-closure charges,” he added.

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0 responses to “RBI doesn’t approve penalties on foreclosure of loans but not done enough to prevent such practice”

  1. Sanjay Khole says:

    I have taken home loan in May-2011 but I want close this account due to sum personal adjustment achieve as terms & condition bank will be charged 2 % Prevent closure charges on total loan Rs. 4.00 lacs i,e. 8000/- so please suggest this is correct ?

  2. Faiyaz says:

    Not sure if RBI is playing safe on one hand by opposing on the other hand that is a prevalent practice in Nationalized banks right under it’s nose.

    What is more agonising with this ruling not in place, that Banks like HSBC also not only charge 5% preclosure penalty even at the fag end of the loan tenure and to add insult to injury levy Servce Tax charges as well.

  3. Sudhir says:

    I have availed of a personal loan from a MNC financial institution. In order to rationalise my monthly cash outflow I recently approached the MNC for foreclosure. They have informed me that they would charge 4 % foreclosure charges. Is’nt this exorbitant ? If RBI can not stop the practice, the least that it can do is lay down uniform & just charges that can not be exceeded by any Bank/Fin Institution.

  4. Somnath Haldar says:

    It is extremely unfortunate that even RBI does not have the power and/or the intention to force the banks under it to stop penalising the honest borrowers who chose to prepay the loans. Funnily, the loan defaulters get all the benefits of reduced interest, delayed payments etc.. Aparently, RBI encourages loan defaulters. So, it pays to be dishonest.

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