RBI opposes penalty on loan prepayment, but takes no action

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This is reflected in two separate sets of replies to a query under the Right to Information (RTI) Act on the issue of high rates of penalties charged on the prepayment of loans, in a practice followed by private, foreign and state-run banks alike.

"RBI does not approve the policy of charging penalty/fore closure charges," the central bank said in a reply to a query raised by RTI activist Subhash Chandra Agrawal, a resident of Chandni Chowk in the capital's old quarters.

The central bank goes on to add that guidelines have also been issued to commercial banks to ensure usurious interest, including processing and other charges, is not levied on loans and advances.

But in another set of reply, the central bank admits such penalties are, indeed, levied - even by state-run banks.

"Banks, including public sector banks, generally levy prepayment charges on loans as prepayment of loans affect their asset-liability management," says the RBI's reply.

"There is no uniformity in the practice followed by various banks as the banks have been given freedom to fix service charges for various types of services rendered by them."

The replies have left the applicant Agarwal rather clueless.

"While RBI has revealed that it does not approve penalty/fore-closure charges on pre-payment of loans, yet on the other hand it has admitted such a faulty practice prevailing in the banks," he said.

"If RBI does not approve the policy, it should immediately direct banks not to levy any such fore-closure charges," he added.