Lenders must come clean on pre-payment clause
There is a need for banks to not only communicate these charges in a transparent manner, but also ensure that charges are fair. Fight against home loan frauds now!
By Padma Ramakrishnan, TNN |
DELHI: The Supreme Court will, in an appeal filed by State Bank of India against a National Consumer Disputes Redressal Commission order, decide whether it is right for banks and housing finance companies to charge pre-payment fees on customers repaying loans ahead of their tenure.
The Commission had, in a recent case, ruled that pre-payment clauses are restrictive trade practices, which restrict the consumers' right to avail loans at a lesser rate of interest. It called upon the country's largest bank to refund the Rs 40,000 it had collected as pre-payment charges from Usha Vaid, who had shifted to another bank. The forum said it appeared that this amount was charged as punishment to the consumer who sought transfer of the loan amount to another bank giving lower rate of interest.
Additional Solicitor General Mohan Parasaran and Sanjiv Kapur, appearing for the bank, said that charging pre-payment fee was a normal banking practice to protect against losses in earnings arising from repayment of a loan before schedule. A bench headed by Justice B N Agarwal has sought a reply from Usha Vaid, the complainant, on whose petition the commission had passed the order.
Reacting to the issue, home loan experts point out that the reason for consumer courts entertaining requests on this score is that banks have been less than transparent in the fixation of floating rate loans. Harsh Roongta, Director, Apna Loans, explains, banks reduce rates for new consumers while continuing to charge higher rates to existing consumers.
Hence the consumer needs to shift to a new lender to get the benefit of reduced rates. It is in this context that pre-payment charges are seen as unfair. "Loan portability is currently constrained by prepayment charges imposed by banks and HFCs.
There is a need for banks to not only communicate these charges in a transparent manner, but also ensure that charges are fair, not changed arbitrarily during the loan tenure," explains Akash Deep Jyoti, Head - Corporate and Infrastructure Ratings, Crisil. Further, in case of floating rate loans, there should be high transparency in benchmark rates.
This will ensure that the customer retains the flexibility to take a rational decision on competing loan options." Transaction costs and funding costs are costs incurred by banks. Transaction costs incurred by a bank when a changeover is done will be a fixed amount (not more than a couple of thousand rupees).
The funding cost will depend on whether the loan was floating or fixed,” says Manoj Vaish, President and CEO - India, Dun & Bradstreet Information Services India Ltd. "If the loan was on a floating rate basis there is no reason why banks should charge more.
If the loan is on fixed rate basis and interest rates have gone up since the time loan was taken, banks will not incur any cost on relending to another borrower. In fact, it will make a profit which should logically be refunded to the borrower. However, if the interest rates have gone down in a fixed rate loan scenario, banks will incur a loss." It is important that interest rate movements be determined by an independent and reliable benchmark. Adds Vaish, "We hear about banks using different benchmarks for floating rate loans
The Commission had, in a recent case, ruled that pre-payment clauses are restrictive trade practices, which restrict the consumers' right to avail loans at a lesser rate of interest. It called upon the country's largest bank to refund the Rs 40,000 it had collected as pre-payment charges from Usha Vaid, who had shifted to another bank. The forum said it appeared that this amount was charged as punishment to the consumer who sought transfer of the loan amount to another bank giving lower rate of interest.
Additional Solicitor General Mohan Parasaran and Sanjiv Kapur, appearing for the bank, said that charging pre-payment fee was a normal banking practice to protect against losses in earnings arising from repayment of a loan before schedule. A bench headed by Justice B N Agarwal has sought a reply from Usha Vaid, the complainant, on whose petition the commission had passed the order.
Reacting to the issue, home loan experts point out that the reason for consumer courts entertaining requests on this score is that banks have been less than transparent in the fixation of floating rate loans. Harsh Roongta, Director, Apna Loans, explains, banks reduce rates for new consumers while continuing to charge higher rates to existing consumers.
Hence the consumer needs to shift to a new lender to get the benefit of reduced rates. It is in this context that pre-payment charges are seen as unfair. "Loan portability is currently constrained by prepayment charges imposed by banks and HFCs.
There is a need for banks to not only communicate these charges in a transparent manner, but also ensure that charges are fair, not changed arbitrarily during the loan tenure," explains Akash Deep Jyoti, Head - Corporate and Infrastructure Ratings, Crisil. Further, in case of floating rate loans, there should be high transparency in benchmark rates.
This will ensure that the customer retains the flexibility to take a rational decision on competing loan options." Transaction costs and funding costs are costs incurred by banks. Transaction costs incurred by a bank when a changeover is done will be a fixed amount (not more than a couple of thousand rupees).
The funding cost will depend on whether the loan was floating or fixed,” says Manoj Vaish, President and CEO - India, Dun & Bradstreet Information Services India Ltd. "If the loan was on a floating rate basis there is no reason why banks should charge more.
If the loan is on fixed rate basis and interest rates have gone up since the time loan was taken, banks will not incur any cost on relending to another borrower. In fact, it will make a profit which should logically be refunded to the borrower. However, if the interest rates have gone down in a fixed rate loan scenario, banks will incur a loss." It is important that interest rate movements be determined by an independent and reliable benchmark. Adds Vaish, "We hear about banks using different benchmarks for floating rate loans
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