‘Banks collude to charge prepayment penalties’

Sources close to the investigation said,banks charged prepayment penalties to “limit competition or not to have extensive competition and also to discipline customers so that they don’t switch banks at a slight drop in interest rate”. Banks,however,said pre-payment results in asset-liability mismatches and there is a cost attached to it.

“The banks have been acting in collusion and charging customers for pre-payment of loan. They decided to charge the interest after a meeting of the Indian Bank Association (IBA) in 2003 where it was decided that all banks would enhance fee-based income and charge customers for paying the loan earlier than the due date. They decided to charge the customers uniformly so that they don’t switch loyalties when interest rates drop,” the source said.

Though the banks did charge interest on pre-payment of loan even before the meeting,the system was formalised and became more organised. “This is an anti-competitive behaviour and in violation of Section 3 of the Competition Act,which deals with anti-competitive agreements,” said the source.

The banks,after the IBA meeting,circulated the decision internally,which is also in violation of banking regulator,the Reserve Bank of India’s guideline.

The sources said the RBI does not encourage such practices and it has clearly stated that banks should not levy “usurious charges” and should not have “income without earning”. According to the RBI,banks must follow transparency and should not charge fee-based income,the source said. However,banks have been found flouting both the RBI guidelines and the Competition Act.

The Competition Commission of India (CCI) had last year received a complaint from a customers regarding imposition of penalty by banks on pre-payment of loans. The pre-payment penalties are imposed to discourage customers from retiring debt before the scheduled date and also from switching banks to take advantage of more competitive rates offered by rivals.

If the Commission finds the banks guilty,the practice may be banned across the industry,the source said. The move would bring a major relief to home loan borrowers who have little choice but to pay pre-payment penalty or stay on with their existing banks even if they have to pay a higher interest rate on their loans.