A day after the Reserve Bank of India, through an advisory, asked banks not to levy pre-payment charges in the case of floating rate loans, most banks are gearing up to implement the decision. On Tuesday, the RBI had said that banks should not recover a charge on pre-payment of floating rate loans after a decision was taken to this effect at the Annual Conference of Banking Ombudsmen on September 5. Executive vice president – Retail Assets, Kotak Mahindra Bank, Kamlesh Rao said, “The bank will certainly consider the same and decide on the implementation,” adding that he needed to go through the RBI communication. MD Mallya, CMD, Bank of Baroda, said that he will take a decision only after going through the advisory. The RBI communication, however said that Mallya “participated in the conference” that was chaired by the central bank’s Deputy Governor KC Chakrabarty. An official of another private sector bank also said that the bank will look towards implementing the decision. Giving the rationale behind central bank’s decision, RBI Deputy Governor Subir Gokarn said, “Floating rate contract is one where the borrower absorbs the interest rate risk and hence the lender of a long-term loan is not bearing any interest rate risk and does not have to make an accommodation to manage that risk.” He added that for a fixed rate loan there is some legitimacy in asking for compensation since the bank commits its resources when lending for a period of 15-20 years and if the contract is terminated before the agreed period, then the resource cannot be deployed immediately and the bank has to bear a cost. The housing finance companies, regulated by the National Housing Bank (NHB), however, are already following this norm and the banking industry is lagging behind on the same. The NHB had issued a circular on October 18, 2010, advised the housing finance companies from charging prepayment charge in cases where the borrowers pre pay from their own sources. “It is advised that pre-payment levy or penalty should not be collected from the borrowers when the housing loan is pre-closed by the borrowers out of their own sources. All HFCs are advised to ensure compliance of the above with immediate effect,” said the NHB in its circular.
What the RBI wants
* Reserve Bank of India (RBI) has directed banks not to recover pre-payment charges in floating rate loans
* The decision on home loans was taken at the Annual Conference of Banking Ombudsmen held in Mumbai on Monday
* RBI has said that customers should not be levied pre-payment charges as banks are better placed to manage interest rate risks
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