RBI bans penalties on prepayment, non-maintenance of minimum balance

The Reserve Bank of India (RBI) has barred banks to remove some of the penal provisions that deter people from engaging banks for saving and borrowing purposes.

Accordingly, RBI has asked banks to desist from levying foreclosure charges on individual borrowers for all floating rate loans with immediate effect.

''It is advised that banks will not be permitted to charge foreclosure charges/pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,'' the RBI said in a statement.

Most customers, especially the salaried class, pre-pay (foreclose) their loans when they find that they have surplus cash with them or when interest rates on their term loans rise. Some customers foreclose their loans with existing banks and switch to banks who offer loans at lower rates.

For banks, the prepayment charges form part recovery of the revenue lost by the foreclosure. Some banks charge as much as two per cent of the outstanding amount as penalty for foreclosure.

RBI, in its first bi-monthly monetary policy statement of 2014-15, announced on 1 April 2014, had proposed certain measures for consumer protection. It was indicated that in the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty.

Accordingly, RBI has now advised banks not to slap foreclosure charges / pre-payment penalties on all floating rate term loans sanctioned to individual borrowers.

RBI also barred banks from levying penal charges on non-maintenance of minimum balances in inoperative accounts, as proposed in the 1 April monetary policy statement (See: Lack of minimum balance in dead accounts can't be penalised: RBI).

RBI's monetary policy announced on 1 April 2014, had proposed certain measures towards consumer protection such as non-levy of penal charges for non-maintenance of minimum balance in any inoperative accounts.

RBI has also asked banks to inform customers regarding the requirement of minimum balance in savings bank account and levy of penal charges for non-maintenance of the same at the time of opening the account in a transparent manner.

RBI said financial inclusion demands unbridled access to banking services and that since the poor have the least capacity to save, basic savings bank deposit accounts should be hassle-free and that banks should not levy non-operation/activation charges for failure to maintain minimum balances.

''It is advised that henceforth banks are not permitted to levy penal charges for non-maintenance of minimum balances in any inoperative account,'' RBI said.