The banking and monetary regulator, Reserve Bank of India last week had asked the banks to waive off penalty levied on pre-payment of home loans. The industry insiders however suggest that the move wouldn't have a considerable effect on the banking sector.
The RBI's prohibitions came from the recommendations of the Damodaran Committee on customer services in banks. This change in policy would allow borrowers to switch from one bank to another taking advantage of the floating rates. Previously the banks charged 2-3% of the balance amount as penalty.
Experts however suggest althought the borrowers might foreclose their home loans, or might even go for loan swaps in short term, but number of such customers would be very less.
"We removed the penalty even before the RBI's directive. And we don't see any business impact on banks," said Mr. M.B. Rao, MD State Bank of Hyderabad.
According to RBI, the removal of penalty on foreclosure would create a competitive environment, resulting in finer pricing of floating rate home loans.