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RBI may scrap penalty on pre-payment

The Reserve Bank is is expected to scrap the provision of penalty on pre-payment of all retail and small corporate loans and do away with fines for failure to maintain minimum balance. The central bank may give directives to this effect to the banks if its recent advice went unheeded. RBI believes that banks have no justification for chargeing pre-payment penalty on any loan since the entire system has moved to floating rates where rates are charged based on the prevailing markets. An RBI source said the regulator is of the view that all prepayments have to be abolished as all loans are based on floating rates. Banks charge between 0.5 to 4 percentage points of outstanding loans if customers attempt to pre-pay mortgage. This deters some customers who want to exit the debt burden early, and is a good revenue stream for some banks. It also helps banks tie customers down.

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