Bankers defend penalty on loan pre-payment
Mumbai, Feb. 2: Banks have expressed concern over the Competition Commission’s intervention on homeloan prepayment penalty issue. They fear this would put pressure on costs, thereby increasing risk and would escalate lending rates.
Last month, the Competition Commission of India (CCI), had sent notices to 15 banks, NBFCs and IBA seeking an explanation on why they had penalised loan foreclosures.
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.
Indian Banks’ Association (IBA), which is the industry lobby of Indian lenders, said banks will send their responses individually to CCI as early as this week.
"IBA’s view is of the opinion that prepayment penalty does not violate competition laws. Moreover, if CCI insists that banks should stop penalising foreclosures, banks will have to hike the lending rates by at least 0.25 per cent to cover the risk," a top IBA official said.
IBA would respond to competition commission’s notice this week, the official added.
In the communication, CCI is understood to have observed that loan prepayment penalties will curb competition in the homeloan market by limiting the chances of a borrower to switch their loan to another lender.
Presently, most of the banks charge prepayment penalty of 1-2 per cent in the event of a customer opting 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 is the fact that certain institutions are charging higher penalties in an attempt to discourage customers from switching their loans to another bank, the official said.
SBI charges 2 per cent prepayment penalty for premature closures within three years of availing the loan. It said the penalty is necessary in the system to avoid any asset-liability imbalances. — PTI
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