Banks told to avoid pre-payment levy on home loans

The Government has advised Public Sector Banks (PSBs) to avoid pre-payment charges of two per cent on borrowers who repaid their housing loan amount taken ‘out of their own funds’.

In the event of imposition of any pre-payment charges on housing loans, the amount needed to be ‘reasonable, transparent and not out of line with the average cost of providing these services’, Minister of State for Finance Namo Narain Meena said in a written reply in the Rajya Sabha today.

He said following the Finance Ministry’s directive issued in May 2010 to PSBs, Indian Banks Association and National Housing Bank, the PSBs had reported that by and large they did not levy any pre-payment charges when the amount was paid by borrowers from their own sources.

‘In general, own funds means funds generated through ‘own sources’ and not through borrowings by any lender,’ he told the House, adding that prepayment of loan by a borrower could take place on account of takeover of the loan by other lender or out of their own sources. In the first case the borrower often got their existing loan refinanced by other lender if the interest rate was lower and attractive.

Regarding the Ministry advising private and foreign banks to follow suit, Mr Meena said in terms of the RBI guidelines granting greater functional autonomy to scheduled commercial banks, freedom had been given to them on ‘all operational matters pertaining to banking transactions’. UNI