Pre-pay home and car loans without penalty

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Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness.

"Banks must not recover pre-payment charges in floating rate loans," the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference.

"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk."

The levy of pre-payment penalty by banks has been criticised by consumer groups and the regulator, since it deprives an individual the choice to end the debt burden. Banks have been using it to prevent customers from shifting loyalty and manage their asset-liability gaps.

A committee headed by former Securities and Exchange Board of India chairman M Damodaran had suggested actions to improve customer service, including a ban on the practice.