7 Sep 11: RBI has banned prepayment charges on floating rate loans. RBI has said that it is not appropriate to impose prepayment charges of floating rate loan contract as in this type of contract the borrower bears the complete interest risk. But since in fixed rate loan contract, the lender is committing resources, it is legitimate to impose prepayment charges.
Normally banks charge 2-3% penalty for prepayment of house or personal loan taken under any contract. But due to the above suggestions by RBI, now they should eliminate these penalties in floating rate contracts but they can levy recover or prepayment charges on fixed contract loan.
The government too had earlier in 2010 has suggested the same to PSB’s, IBA and National Housing Banks. The recent suggestions by RBI will be followed by banks on passing of the official circular by the Banking Ombudsmen.
However, state run banks like SBI, SBH and so on do not impose any kind of prepayment charges if the whole amount is prepaid by the borrower from his own resources and not by borrowing money from other lenders.
Source: Money control.com