Government planning to change Prepayment charges for home loans

Sumeer is a Bangalore based IT professional. He took Rs 40 lakh home loan in year 2008 from a leading Indian bank. Within in 3 months of his disbursement, bank has increased interest rate 3 times so Sumeer is paying now 2.25 % higher. He is nearly paying Rs. 50,000 pa more interest.

It has been seen that banks are arbitrarily increasing the rates and existing customer has no way out. Customer can’t take his loan to other banks because of steep prepayment penalty.

Government started paying attention to this and now planning to come up with a remedy for home loan customer. It may come up with a provision of two-month window for new borrowers. Within the window period, if borrower finds cheaper rates from other banks, he will be allowed to shift his loan to other bank without prepayment penalty. By this banks will have to keep the check on raising interest rates too quickly.

The Indian Banking Association (IBA) will work on it and come up with new rules for prepayment penalty. It may include amount allowed for prepayment, penalty charges etc.

This is a welcome initiative by Government of India. Along with this, Government should also look into the problem of existing loan customer. It has been trend with the banks not to extend benefits of lower rates to old customers. There have been many complaints by customers to RBI and Government.