Cap likely on home loan pre-payment penalty

Home loan borrowers may get a piece of good news soon. Pre-payment penalties, which are 2 per cent or above of the outstanding loan for most banks at present, may be brought down to 0.5-1 per cent.  The Reserve Bank of India (RBI) is in talks with banks to bring down pre-payment penalty charges and has sought their views on how much the cap should be. People in the banking industry say a consensus has emerged among lenders that a penalty within 1 per cent of the outstanding loan will be feasible.  “There are two reasons why banks charge pre-payment penalty. First, from the asset-liability management perspective, when a bank lends for a longer tenure, it also needs to raise funds accordingly. So, there are liabilities to be paid off over a period of time. This becomes difficult when loans are paid before time. Second, in view of the administration and processing costs, banks may tend to charge less in the initial years in the hope that charging more in future would make up for it,” IDBI Bank Executive Director R K Bansal said.  The regulator’s objection to high charges is with respect to fair treatment to customers.