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Banks not ready to withdraw prepayment penalty on foreclosure

Banks not ready to withdraw prepayment penalty on foreclosure
PTI
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First Published: Tue, Feb 02 2010. 01 58 PM IST
Updated: Tue, Feb 02 2010. 01 58 PM IST
Mumbai: Banks have expressed concern over the competition commission’s intervention on homeloan prepayment penalty issue as they fear that this would put pressure on their costs, increase risk and even lead to higher lending rates.
Last month, Competition Commission of India (CCI), the apex body that operates to sustain and promote competition, sent notices to atleast 15 banks, NBFCs and IBA seeking explanation on why they penalise borrowers who choose to foreclose loans.
In the communication, CCI is understood to have observed that loan prepayment penalties will suppress the competition in the homeloan market by limiting the chances of a borrower to switch their loan to another lender.
Banks which have been asked to explain this matter include SBI, ICICI Bank, Axis Bank, PNB, Canara Bank, IOB, Indian Bank, OBC, HDFC Bank amongst others. Besides, home financiers like HDFC and LIC Housing Finance were also served notices by CCI.
According to sources, many of these institutions have already replied to CCI, to make it clear that the removal of prepayment penalty will result in higher lending risk and may cause asset-liability mismatch in banks.
Banks, which have been asked to explain, include SBI, ICICI Bank, Axis Bank, PNB, Canara Bank, IOB, Indian Bank, OBC, HDFC Bank amongst others. Besides, home financiers like HDFC and LIC Housing Finance were also served notices by CCI.
Presently, most of the banks charge prepayment penalty in the range of 1-2% in the event of a customer opts to close the homeloan prematurely. Banks do this with a view to cover the interest-loss owing to foreclosure of the loan.
What irked CCI, inviting their attention to the matter is the fact that some institutions are charging higher penalties as high as 3-4% to discourage customers from switching their loans to another bank or a financial institution, the official said.
SBI, which charges around 2% prepayment penalty for premature closures within three years of availing the loan, said the penalty is necessary in the system to avoid any asset-liability imbalances.
“Prepayment penalty is an accepted norm in all developed markets across the world. Banks give loans for a specified maturity and raise liabilities to lend. During foreclosures, banks will have to take a hit in cost terms. This necessitates prepayment penalty,” a top SBI official said.
Besides, the cost of all borrowers are likely to go up if banks stop penalising customers for loan foreclosures as banks will be forced to start hike lending rates to cover the interest-loss, the official added.
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First Published: Tue, Feb 02 2010. 01 58 PM IST