Press Information Bureau

Government of India

Ministry of Finance

06-September-2011 18:09 IST

Levy of Penalty on Foreclosure of Home Loans

Government, in May 2010, advised Public Sector Banks, Indian Banks’ Association and National Housing Bank that no pre-payment charges may be levied by the lending institutions when the loan amount is paid by the borrowers out of their own funds; and if any pre-payment charges are to be imposed on housing loans, the same need to be reasonable and transparent and not out of line with the average cost of providing these services.

The Public Sector Banks (PSBs) have reported that by and large they do not levy any pre-payment charges when the amount is paid by the borrowers from their own sources.

In general, own funds means funds generated through ‘own sources’ and not through borrowings by any lender. Prepayment of loan by a borrower can take place on account of (i) takeover of his / her loan by other lender, and (ii) out of their own sources. In the first case, the borrower often gets their existing loan refinanced by other lender, if the interest rate offered by other lending institution in the market was lower and attractive.

In terms of RBI guidelines, in the context of granting greater functional autonomy to banks, freedom has been given to scheduled commercial banks, including public sector banks, private sector banks and foreign banks, on all operational matters pertaining to banking transactions.

This information was given by the Minister of State for Finance Shri Namo Narain Meena in a written reply to a question raised in Rajya Sabha today.

DSM/SS/GN

Prepayment charges on home loans should be waived for own fund repayments or, if imposed, be reasonable and transparent. Government advisory states that pre-payment charges should not be levied when borrowers repay housing loans from their own funds; if imposed they must be reasonable, transparent and in line with average service cost. Public Sector Banks report generally not charging prepayment fees for own-source repayments. Prepayment arises either by loan takeover/refinance or repayment from own funds. RBI guidelines give scheduled commercial banks operational autonomy, while the Government's communication establishes an expectation of fairness and transparency in prepayment charging.