RBI decision not to charge penalty from customers for prepaying floating rate term loans made banks cautious
By Joseph Samson
May 1, 2014
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Recently Apex bank has asked the banks to stop charging penalties on customers for prepaying floating rate term loans. This RBI decision has made the bank cautious. Banks believe that if corporate houses will follow this then this can lead to the increase in asset-liability mismatches. In the monetary policy review meeting held on 1st April RBI stated that keeping the welfare and protection of the customers in mind the central bank had proposed a ban on prepayment penalties. RBI said that banks should consider allowing borrowers the possibility of prepaying floating rate term loans without any penalty.

A PSU bank senior official stated that RBI has not specified any step for retail borrowers also, it didn’t put a cap on prepayment. There is already a ban on prepayment penalty on floating rate housing loans, a major chunk of retail floating loans. This was the major reason that perplexed the banks, the permission of allowing corporate houses to prepay their term loans without any penalty wil create asset liability mismatches.

Earlier, RBI had allowed home loan customers to shift loans from one lender to other, without paying any charges to the original lender.

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