Foreclosure amount by banks
Arvind Sehdev
(Querist) 16 February 2012
This query is : Resolved
Can banks charge us foreclosure ??
My client closed his loan before stipulated time period and was charged a foreclosure amount by a government bank....
I read it long time back that they cannot. So if there is something like this or some judgment can I have it please..
I need it for a client of mine. I need to file a consumer case against the bank for which I need some authority/ case law or some established law/ rule that they cannot charge the same.
ajay sethi
(Expert) 16 February 2012
arvind sachdev
agreement executed by borrower with bank contains a clause that in event of prepayment the borrower shall be liable to pay 2%prepayment charges .
in view of agreement signed by borrower bank is justified in asking for preyament penalty
ajay sethi
(Expert) 16 February 2012
HINDU, October 25, 2011
a move to introduce more customer-friendly norms, the Reserve Bank India (RBI) on Tuesday proposed to notify banning prepayment penalty on floating rate home loans, as recommended by the Banking Ombudsman recently, while hiking the short-term indicative rate (repo rate) by 25 basis points to tame inflationary pressures.
However, the RBI is of the opinion that by December, 2011, the price rise is likely to come down and another hike may not be warranted.
The RBI is firmly of the view that controlling inflation is imperative for sustaining growth over the medium-term and for increasing the potential growth rate. “The potential growth rate is not a long-term constant; nor is it exogenously determined,” said RBI Governor D. Subbarao while announcing the half-year Monetary Policy Review of 2011-12. “It is critically dependent on policies that create a congenial investment climate and encourage investment activity,” he added.
The challenge for the government and the RBI is to ensure that demand is constrained in the short-term to bring inflation down, but at the same time to encourage supply response so as to improve productivity and expand the potential output of the economy in the medium-term.
While maintaining the inflation rate at 7 per cent for 2011-12, the RBI revised the growth rate projection from 8 to 7.6 per cent. “Elevated inflationary pressures are expected to ease from December, 2011, though uncertainties about sudden adverse developments remain.”
The policy document further said that the RBI will issue the final guidelines on credit default swaps by November-end.
As the banking system prepares to go on to the Basel-III framework requiring higher capital adequacy, the RBI said the draft guidelines for its implementation will be issued by December-end. As regards the micro finance sector, the RBI has given the go-ahead for creating a new category called NBFC-MFIs (NBFC-micro finance institutions). Further, a separate set of guidelines for overseas investment by core investment companies (CICs) in financial and non-financial sector companies will be issued.
The RBI said liberalisation had led to increased pace in the number of branches opened in Tier 3 to Tier 6 centres.
However, it is observed that branch expansion in Tier 2 centres has not taken place at the desired pace. To provide enhanced banking services in Tier 2 centres, it is now proposed to permit domestic scheduled commercial banks (other than RRBs) to open branches in Tier 2 centres (with population 50,000 to 99,999) without the need to take permission from the Reserve Bank in each case, subject to reporting.
In the area of financial markets, four important initiatives have been announced. First, the RBI will issue the final guidelines on the cash settled 5-year and 2-year interest rate futures (IRFs), including the final settlement price by end-December 2011. Second, guidelines on credit default swaps (CDS) will be made effective by end-November 2011. Third, guidelines on short-sale in government securities will be issued by end-December 2011.
Fourth, a Working Group will be constituted to examine and suggest ways for enhancing secondary market liquidity in the G-Sec and interest rate derivatives markets.
Rajeev Kumar
(Expert) 16 February 2012
Yes sethi has rightly enumerated and i have also gone through THE HINDU article.
Guest
(Expert) 16 February 2012
I endorse the views of Shri Sethi.
Arvind Sehdev
(Querist) 16 February 2012
Thanks Sethi Sir,
But my client was charged forclosure around 4 lacs on a loan on 40 lacs. which is way more than 2 percent.
2 percent of 40 lacs is Rs.80,000
I was thinking of taking the case to consumer court. But for that I need some solid base some good law. Any ideas where to look for a law relating to this.
ajay sethi
(Expert) 16 February 2012
thats exhoribtant . if you have any document in writing that bank has charged 4 lakhs as prepayment charges move ombudsman of the bank .
since you are alawyer and well vered too see the agreement signed by your client . it must be mentioning prepayment charges that can be levied .
file complaint before consumer forum for deficency in service
Arvind Sehdev
(Querist) 16 February 2012
i mean is there anywhere written that the cannot charge more than _______ percent of the amount...
ajay sethi
(Expert) 16 February 2012
arvind sachdeva
it is mentioned in agreement executed between bank and borrower . prepayment charges are specified in agreement
Arvind Sehdev
(Querist) 16 February 2012
Ajay ji,
It's Arvind "Sehdev" not Sachdev or Sachdeva.... :]
I meant is there a law regarding this... That i understand I need to check the agreement...
But.... is there a law or case study that says banks cannot charge more than this much percent ?
ajay sethi
(Expert) 16 February 2012
sorry arvind sehdev . ( not sachdeva)
Posted: Sun, Feb 27 2011 MINT
The Competition Commission of India, a statutory body whose role is to promote competition and protect interest of consumers, in December ruled that banks and housing finance companies are justified in levying prepayment penalty on foreclosure of home loans.
Despite the ruling, all is not lost for home loan customers who want to prepay. In fact there are ways through which one can avoid prepayment penalty.
The ruling
The Commission, while passing the judgement, observed that there is no reason to believe that customers do not have enough choice available. Apart from various private sector banks, 43 housing finance companies (HFCs), 27 public sector banks, 53 cooperative banks provide home loan and their prepayment penalty rates vary.
The Commission also considered growth in home loan market between 2003-04 and 2008-09 when the industry reported a compounded annual growth rate of 24.9% to conclude that prepayment charges have not caused any negative impact on the home loan market.
ajay sethi
(Expert) 16 February 2012
View of lenders
Banks and HFCs justify levying prepayment penalty as they believe it is needed to maintain a balance between deposits and credit and such charges provide certainty about the cash flow. Defending prepayment charges, some HFCs argue that even the National Housing Bank (NHB), the regulator of housing finance companies, charges prepayment penalty if they decide to prepay their liabilities earlier than stipulated time frame.
“It is not that we arbitrarily impose prepayment penalty. The provision of prepayment penalty is specifically mentioned in the loan documents signed by home loan borrowers and it is not a breach of trust on our part,” said Albert Tauro, chairman and managing director, Vijaya Bank.
The general practice
Prepayment charges vary from lender to lender and there is no uniform practice. While some banks such as Axis Bank Ltd and IDBI Bank Ltd, do not levy any prepayment penalty, some levy such penalty only if another bank is taking over the loan. However, the rest levy such charges irrespective of the source of fund. Usually, the penalty varies between 1% and 5%.
“In many cases, prepayment penalty depends on the time frame. Higher the time frame, lower the charges,” said Kartik Jhaveri, founder and director, Transcend Consulting, a Mumbai-based financial planning and wealth management firm.
The silver lining
In a guideline issued in 2010, NHB prohibited HFCs from charging prepayment penalty in case a borrower is pre-closing the home loan from his own source.
“There might be some initial glitches but overall the compliance of the guidelines has been very good. Since November till date, close to 13,000 home loans have been pre-closed without being charged any penalty,” said R.V. Verma, chairman and managing director, NHB.
The grey areas
Most lenders levy prepayment penalty only if a home loan borrower is pre-closing the loan with borrowed money. But, in practice things are not as simple. The onus of proving that the fund used to pre-close a loan is not borrowed from any other lender lies with the borrower. Says Verma, “If home loan borrowers wish to pre-close their loan without having to pay any penalty, they need to prove that funds are out of their own resources. Even if someone has borrowed from one of their relatives, it would be considered their own fund.”
According to financial planners, the easiest way to prove that the fund belongs to you is a bank account statement.
Says Surya Bhatia, certified financial planner and principal consultant, Asset Managers, “In many cases borrowers have multiple accounts and someone looking for a pre-closure of home loan should ideally have bank statements of all their accounts with them. Ideally, the bank account statement should be of six months duration.”
In circumstances when someone borrows from their near and dear ones, they (borrowers) should ideally do so through cheques. It will make the job of proving the source of funds easier. Also, having bank account statements of relatives from whom you borrow can be helpful. “If someone redeems his/her investments to pre-close home loan, he/she should keep the redemption letter to prove the same,” added Bhatia.
What should you do?
If you fail to prove the origin of the fund, you should insist the lender for a one-on-one discussion. “We receive a lot of complaints from borrowers regarding the sources of fund. While borrowers invariably insist that the fund belongs to them, lenders refuse to buy the argument in absence of any proof. In such circumstances, we suggest both the lenders as well as customers to discuss and sort out the issue,” said Verma.
“Ever since the time we have issued the new guidelines on the same, the number of complaints has reduced substantially,” added Verma without disclosing the number of complaints received after the issuance of the new guidelines.
However, there is a better way out. “Every lender has the power to waive certain penalties including prepayment penalty. It depends upon the negotiating ability of the customer,” said Jhaveri.
Also, look for lenders who do not charge prepayment penalty provided interest rate charged by them is not too high compared with peers. “Interest rates hold the key. If the difference is not substantial, it makes sense to opt for a lender who does not penalize for prepayment,” said Ashish Kapur, chief executive officer of Invest Shoppe Pvt. Ltd, a Delhi-based wealth management and advisory firm.
There are other factors besides interest differential to be kept in mind. One should only transfer loan to another lender if a repayment tenor of 10-15 years is still left. Else considering average prepayment penalty of 2%, gains will be negligible.
Illustration by Shyamal Banerjee/Mint
Arvind Sehdev
(Querist) 16 February 2012
Thank you soo very much Mr.Ajay.. This information was indeed enlightening.
Query Satisfied... :]
