Banking News

Prepayment penalty on floating rate term loans

RBI has now instructed banks not to charge foreclosure charges/ prepayment penalties on all floating rate term loans to individual borrowers. This was a long standing customer demand. As in most other industries, in banking too new customers often benefited at the expense of existing customers. When interest rates went down, existing borrowers did not get the benefit. If they tried to become new borrowers of another bank and close the loan with the present bank, they were charged a stiff prepayment penalty that made switching not viable. So, borrowers in effect became hostages. The circular frees the hostages. However, it does not extend to other entities such as partnerships and limited companies in trade and industry. Presumably, it will apply to a proprietorship business, say, a doctor or a farmer. Nor does it apply to fixed rate loans where the borrower has taken a calculated risk for a lower rate.
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