Repaying your loans before the deadline and bringing down your debt level is always advisable. It will soon become a no-brainer decision as the Reserve Bank of India has recommended removing any pre-payment penalty on
floating rate loans.
Floating rate loans comprise more than three-fourths of the
outstanding home loans in the country. Loans for vehicles are also disbursed on floating interest rates, which keeps changing to reflect the prevalent interest rates in the broader market.
The National Housing Bank (NHB) is also planning to introduce similar guidelines on pre-payment penalty for housing finance companies, which are regulated by the NHB and not by the central bank.
EXPERT TIP: How to cut your tax burden "Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it, to borrowers and, thus, banks only substitute interest rate risk with potential credit risk. The bank will, however, be free to recover/charge appropriate pre-payment penalties in case of fixed rate loans," the RBI said in a statement.
The decision is part of the 10 action points to improve customer service at banks, which was released by the RBI after the Annual Conference of Banking Ombudsmen held in Mumbai on September 5, 2011.
Lenders have also been asked to offer long-term fixed rate loans to customers. Banks can address their asset-liability mismatch issues by hedging their risk in the interest rate swaps market, the RBI said.
MUST READ: Checklist for when applying for loan In an effort to improve customer service by the banking industry, the RBI and the Indian Banks' Association will jointly look into the issues related to monetary compensation for mental harassment suffered by customers. It will be examined whether compensation should be limited to actual loss, whether the policies of the banks' boards on compensation should include mental harassment as a ground for compensation, whether mental harassment issues can be codified for compensation and whether there should be a cap on the compensation amount.
It has also been decided that banks should issue tax deduction certificates to account holders and dispatch it to their addresses.
To bring more transparency in the banking system, it has been decided that banks should provide regular loan statements to borrowers. It should also convey the effective annual rate on the loan account, which includes all the costs incurred by the borrower. Such a statement will allow customers to detect any hidden charges.
Bank customers will also be in an advantageous position if there is any monetary dispute involving ATM and Internet-based transactions. The onus will be on the bank to prove the customer's negligence or mistake. Banks will also have to compensate customers for losses arising out of non-authorised transactions.
The RBI organises a conference of all the Banking Ombudsmen every year. Officials from the Banking Codes and Standards Board of India, the IBA and leading banks also attend the conference.
