The waiver of prepayment penalty on home loans is not going to impact banks financially, say experts.
The Reserve Bank of India last week prohibited banks from imposing penalty on pre-closure of home loans based on a recommendation by the Damodaran Committee on customer services in banks.
“I welcome this decision because home loan is a national priority and customers stand to gain,” Mr M. Narendra, Chairman and Managing Director, Indian Overseas Bank, told
Generally, banks were charging a penalty of one to three per cent on foreclosure of home loans on the ground that it would deter customers from frequently shifting from one bank to another in the highly competitive floating interest rate regime.
Big shifts not likely
“The customers were chased for retail loans earlier and there was enough liquidity in the market. But today, that situation is not there, and the costs are not cheaper for any bank. Hence, the waiver of penalty will not trigger any big shifts in the market,” Mr Narendra said.
According to Mr M. Bhagavantha Rao, Managing Director, State Bank of Hyderabad, home loan borrowers will now be able to foreclose loans more willingly if they receive funds.
In the absence of prepayment penalty, some may also be tempted to go for loan-swaps if any attractive short-term schemes are offered by other banks.
“We removed the penalty even before the RBI's directive. And we don't see any business impact on banks,” he said.
Small number
The number of customers who prefer to foreclose home loans is only a fraction for any bank, say experts.
According to the RBI, the removal of prepayment penalty would lead to reduction in the discrimination between existing and new borrowers, and competition among banks will result in finer pricing of the floating rate home loans.