RBI says the waiver of pre-payment penalty is applicable only for home loans carrying floating rate of interest. Why are borrowers who had obtained home loans on fixed interest basis being left out?

he Reserve Bank of India (RBI) has, through a circular dated 5 June 2012, finally issued instructions to all the commercial banks not to levy penalty for pre-payment of housing loans with immediate effect. In the annual monetary policy statement 2012-13 announced on 17 April 2012, it was stated by RBI governor as under:

"It is proposed not to permit banks to levy foreclosure charges/prepayment penalties on home loans on a floating interest rate basis. Detailed guidelines in this regard will be issued separately."

It is obvious therefore, that the decision to waive pre-payment penalty on home loans was taken by RBI on 17 April 2012, while it took more than one and a half month for the RBI to issue these simple instructions, which again appear to be a half hearted measure for the following reasons:

Between 17 April 2012 and 5 June 2012, a number of home loan borrowers would have foreclosed their home loans and paid pre-payment penalty, as stipulated by the banks concerned.  It is unfair for these borrowers who have paid pre-payment penalty on account of the delay on the part of RBI in issuing instructions to banks, when the RBI at the apex level has taken a policy decision in this regard much earlier and publicly announced it also, thereby raising the expectations of the public. But whatever be the reasons for the delay, RBI could have made it clear in this present circular that this is applicable for all loans foreclosed from 17 April 2012 and those banks who have charged any penalty should refund this amount to the borrowers without their asking. By making these instructions effective from 5 June 2012, the RBI has deprived these benefits to those borrowers, who have pre-paid their loans during this intervening period. To be fair, the RBI should make amends now and give effect to these guidelines from 17 April 2012 itself and arrange to refund such charges, if any collected by the banks.
But the bigger problem is that as per the present guidelines of RBI, these instructions for waiver of pre-payment penalty are applicable only for home loans carrying floating rate of interest. So what happens to those borrowers who had obtained home loans on fixed interest basis?  When interest rates had reached a peak, many banks had aggressively marketed fixed interest rate loans and the borrowers fell prey to these marketing tactics as they hardly understood the difference between the two, and were mostly guided by what the bank managers advised them. Now to deprive them the benefit of pre-closure without penalty is neither fair nor equitable, more so when these home loan borrowers are not experts in projecting the interest rate scenario to go for fixed rate loans. They would have rather signed on the dotted lines, without understanding the principles behind these interest rate movements.   
                                                              
Surprisingly, the National Housing Bank (NHB), which controls over 54 housing finance companies in the country has stolen a march over the RBI by announcing waiver of pre-payment penalty as early as on 19 October 2011 and it has been more generous enough to extend this benefit to all the borrowers availing home loans on both fixed and floating rate basis.

NHB has directed that pre-payment penalty on pre-closure of home loans should not be charged under following circumstances:

1. Where the home loan is on floating interest rate basis-pre-closure through any source.

2. Where the home loan is on fixed interest rate basis-pre-closure through own source. The expression "own source" for this purpose means any source other than by borrowing from a bank/HFC/NBFC and or a financial institution.

It is obvious that the NHB has taken a bold pro-customer stance despite the open opposition to this proposal from the chairman of the leading housing finance company in the country. There is, therefore, no rhyme or reason for the RBI to restrict such a benefit to home loan borrowers who have availed loans on floating rate basis only and exclude those on fixed rate basis. In fact most of the pre-payment of home loans takes place when a borrower retires from service and decides to clear all his liabilities from the retirement benefits. And to slap him with the pre-payment penalty at this stage in his life is certainly not a happy situation. The irony of the banking industry is that the banks levy a penalty when a honest borrower pre-pays his loan well in advance of the due date, but at the same time banks do not mind offering lot of concessions and waive even a part of interest, if the same loan becomes a non-performing one (NPA), just to get this NPA out of their books.

As the lead financial regulator in the country, the RBI should have taken the first step in this regard. However, will RBI now follow the footsteps of its offspring and make amends for the benefit of a large number of borrowers of home loans from the banking institutions?

 (The author is a banking analyst. He writes for Moneylife under the pen-name 'Gurpur'. )