It's good news for those thinking of prepaying their home loans to lessen the EMI burden. The Reserve Bank of India (RBI) on Tuesday directed banks not to impose pre-payment charges on floating rate loans, a decision taken at its annual conference on banking ombudsman held on Monday.
Banks can, however, levy pre-payment charges on fixed rate loans.
"Banks must not recover pre-payment charges in floating rate loans," the RBI said.
The regulator said customers should not be levied pre-payment charges as banks are better placed to manage interest rate risks than customers.
"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it than borrowers and, thus, banks only substitute interest rate risk with potential credit risk," the RBI said.
Banks currently impose 2% of the outstanding loan amount as the pre-payment charge if a customer pays the entire home loan.
When contacted, an ICICI bank spokesperson refused to comment and said they needed to go through the circular in detail.
Companies such as HDFC and LIC Housing Finance are not likely to be hit by the decision as the National Housing Board regulates them.
The RBI also listed some other action points to improve bank customer services. It directed banks to compensate customers for losses arising out of non-authorised transactions on ATMs.
In case of ATM or internet banking transactions related to monetary dispute, the onus of proving the customer's negligence or mistake should be on the bank, the central bank said.