No prepayment fee for floating rate loans

No prepayment fee for floating rate loans

Mumbai: Banks must not charge prepayment fees on floating-rate loans and should offer long-term fixed rates if customers seek this. This is oneof the key decisions taken at the annual conference of banking ombudsmen held at the Reserve Bank of India’s (RBI) Mumbai office on Tuesday.

After the conference, RBI released 10 action points to improve customer service at banks.

Floating-rate loans pass on the interest-rate risk from banks to borrowers thus substituting that with potential credit risk an RBI release said.

Typically, banks discourage those who take long-term loans such as mortgages from opting for fixed-rate loans and push for floating-rate loans. This is because they do not want to get into asset-liability mismatches by creating long-term assets (loans) supported by short-term liabilities (deposits). RBI said banks should give fixed-rate loans and avoid asset-liability mismatches by hedging their risks in the interest-rate swap market.

At least 80% of the outstanding home loans in the Indian financial system are priced on a floating-rate basis.

Yet another critical decision is to jointly explore the possibility of offering compensation to customers for “mental harassment" by banks. This will be undertaken jointly by RBI and banking lobby group Indian Bank’s Association (IBA).

Issues that may receive attention will be whether only actual loss should be considered for compensation; mental harassment issues can be codified for compensation; limits on compensation; and whether the policies of the banks’ boards on compensation should include mental harassment as a ground for this, RBI said.

It did not say what constitutes mental harassment.

In the case of ATM and Internet-based banking transactions, in the event of any monetary dispute involving the customer and the bank, the onus should be on the bank to prove that the customer has erred, the conference decided. Also, the customer will be compensated for losses arising out of unauthorized transactions.

Among other issues related to customer service, banks have been asked to provide insurance “of some reasonable amount" on customers’ credit and debit card transactions.

In a bid to expose hidden costs charged by banks, the conference also decided that borrowers should be provided information on the annualized all-in cost (annual effective rate) on their loan accounts.

Banks have also been asked to start providing one view of all bank accounts of a customer including deposits, loans, etc., with the help of available technology, such as core banking solutions (CBS).

This process has to be completed within one year.

RBI introduced the banking ombudsman programme for quick and inexpensive redressal of customer grievances in 1995.

The scheme includes complaints on Internet banking, non-adherence to the fair practices code for lenders and non-observance of RBI guidelines on engagement of recovery agents by banks.

RBI organizes a conference of all the banking ombudsmen every year, which includes officials from the Banking Codes and Standards Board of India, IBA, Credit Information Bureau of India Ltd and some leading banks.

RBI deputy governor K.C. Chakrabarty chaired Tuesday’s conference, which was attended by State Bank of India chairman Pratip Chuadhuri and M.D. Mallya, chairman of IBA and the chief of Bank of Baroda, among others.

The bankers’ body will oversee the adoption of fair practices to customers.