Banks not ready to withdraw prepayment penalty on forclosure

Banks have expressed concern over the competition commission's intervention on homeloan prepayment penalty issue as they fear that this would put pressure on their costs, increase risk and even lead to higher lending rates.

Banks have expressed concern over the competition commission's intervention on homeloan prepayment penalty issue as they fear that this would put pressure on their costs, increase risk and even lead to higher lending rates.

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Last month, Competition Commission of India (CCI), the apex body that operates to sustain and promote competition, sent notices to atleast 15 banks, NBFCs and IBA seeking explanation on why they penalise borrowers who choose to foreclose loans.

In the communication, CCI is understood to have observed that loan prepayment penalties will suppress the competition in the homeloan market by limiting the chances of a borrower to switch their loan to another lender.

Banks which have been asked to explain this matter include SBI, ICICI Bank, Axis Bank, PNB, Canara Bank, IOB, Indian Bank, OBC, HDFC Bank amongst others. Besides, home financiers like HDFC and LIC Housing Finance were also served notices by CCI.

According to sources, many of these institutions have already replied to CCI, to make it clear that the removal of prepayment penalty will result in higher lending risk and may cause asset-liability mismatch in banks.