Lately, the Reserve bank of India (RBI) has been deluged by customers' complaints regarding the prepayment charges levied by the banks.
The apex bank has disapproved of such charges. Most of the private sector banks charge between 2 percent and 5 percent of the principal sum and/or lump sum for the same. Even SBI has started penalising its customers for paying in advance.
The banks defend themselves by saying that once they book a loan they plan for the incoming interest over the tenure and the consumers spoil their plans by paying in advance.
The banks say that the penalty charges are meant to compensate for the notional losses in tapping a new customer and deter a customer to pay in advance, thereby increasing work arising out of the same for the bank.
The Indian contracts Act has a provision to strike off a clause in case it is either 'unconscionable or against public policy'. RBI has only expressed concern over this issue and has not taken any strict action to put an end to these charges.
Although the reserve bank does not approve of prepayment charges levied by the banks, in a reply to a query filed under the right to information act (RTI), the apex bank said "In the context of granting greater functional autonomy to banks, operational freedom has been given to scheduled commercial banks on all matters pertaining to banking transactions, including foreclosure of loans."