The Reserve Bank of India has frowned on the practice of banks slapping penalty charges on premature repayment of loans, saying it did not approve of such charges. However, it stepped back from any role in actually enforcing its point of view.
Replying to a query filed under the Right to Information Act, the central bank said, “RBI does not approve of charging penalty or foreclosure charges. We have... advised banks to lay out appropriate internal principles and procedures so that usurious interest including processing and other charges are not levied by them on loans and advances.”
According to Economic Times, the central bank also admitted that it had received complaints on charging of penalty on premature payment of loans by banks who had been “suitably advised”. But RBI was silent on what action had been taken against banks who refused to follow the advice. The charges disadvantage those wanting to either pay off a loan or move to one offering better terms.
Even though most banks operating in India impose such charges, RBI’s reply to the RTI query noted, “In the context of granting greater functional autonomy to banks, operational freedom has been given to scheduled commercial banks on all matters pertaining to banking transactions, including foreclosure of loans.”
The applicant asked RBI if it was aware of private and multinational banks levying foreclosure charges or penalties for premature payment of loans and what steps had been taken in this matter. RTI activist Subhash Chandra Agarwal also asked what steps had been taken by RBI to ensure that uniform interest rates were charged by all banks.
For credit card operations, RBI has advised banks to formulate a well documented policy and a fair practice code that charges interest rates that could depend on the payment or the default history of the cardholder. The central bank said in order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products.