Should banks scrap prepayment penalties?
By Vaibhav Aggarwal
Sep 25, 2009
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Responding to an RTI, Right to Information, query regarding prepayment charges levied by the banks, Reserve Bank of India said that it was not in favour of such penalties and had asked the banks to end such practices. It also said that it had received many complaints on this matter.

These charges hinder a customer to pay off his loan and move to another with better terms. According to a customer most of the people who avail loans fear paying this extra 2% bank service charge. Even SBI has started levying this charge.

By levying such penalty charges, banks want to retain their customers who want to avail a loan with better terms and conditions. By doing so, banks are limiting their customers' options. Instead they should try to retain them by offering them competitive rates. Doing away with the prepayment charges will help in attracting more customers for the banks.

Banks should come out with better practices to lure customers. For instance, in the United States a consumer has a wide range of choices. If he wants to avail a loan with lower interest rates, he has the option of signing a prepayment clause. However, he also has the option of going for terms that offer standard rates and no penalty on early payment.

The Indian banking system should also work on similar standards. Groups like National Consumer Disputes Redressal Commission have already questioned banks on this issue.


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