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RBI asks banks not to levy foreclosure charges on floating rate loans

07 May, 2014

The Reserve Bank of India (RBI) has scrapped foreclosure charges or pre-payment penalties on individual borrowers for all floating rate loans with immediate effect, it said in a notification on Wednesday.

Earlier it had suggested banks to do away with such charges but this has been largely ignored by the banks. With the new rule it has effectively banned such charges.

In the first bi-monthly monetary policy statement for 2014-15 released in April, the central bank had proposed a ban on pre-payment penalties. Floating loan products include housing, corporate, vehicle and personal loans. Some banks are charging a pre-payment penalty of up to 2 per cent of the outstanding loans.

Also, the RBI has directed the banks in the country to abolish penalties on customers who are unable to maintain a minimum balance in any inoperative bank accounts to safeguard customer interest.

A saving bank account is considered as inoperative or dormant if there are no transactions in the account for over a period of two years. In 2012, the RBI had directed banks not to levy penalty on customers for non-operation or activation of basic savings bank deposit accounts. It has said banks can reduce the suite of services which are associated with such dormant accounts instead of charging money for maintaining the inoperative accounts.

Meanwhile, the RBI has also allowed minors above the age of 10 to open and operate savings bank accounts independently and also use other facilities like ATM and cheque books, as part of its efforts to promote the objective of financial inclusion and to bring uniformity among banks in opening and operating minors’ accounts.

According to the notification, issued by the central bank, a savings, fixed or recurring bank deposit account could be opened by a minor of any age through their natural or legally appointed guardian.

Earlier, a minor could open an account (fixed or savings deposits accounts) with his/her mother as guardian.

These consumer friendly moves come at a time when the central bank has started tracking consumer inflation as a key metrics for its monetary policy changes. Earlier, wholesale price inflation was treated as the key for deciding on policy rate changes.

(Edited by Joby Puthuparampil Johnson)


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RBI asks banks not to levy foreclosure charges on floating rate loans

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