RBI Abolishes Pre-Payment Penalty on Floating Rate Loans

Providing relief to borrowers, Reserve Bank on Wednesday directed banks not to levy any penalty on individual borrowers for pre-paying floating loans.

"...it is advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect," RBI said in a notification.

Floating loan products include housing, and auto loans.

In the first bi-monthly monetary policy statement for 2014-15 released last month, the RBI had said banks should consider allowing their borrowers the facility of prepaying floating rate term loans without any penalty in the interest of their customers.

Some banks are charging pre-payment penalty of up to 2 per cent of the outstanding loans.

Two years ago, RBI had barred banks from levying foreclosure charges or pre-payment penalties on home loans on floating interest rate basis.

On Tuesday, the RBI asked banks not to levy penalties on customers who don't maintain a minimum balance in any inoperative account, as part of a consumer protection initiative.