With rising interest rates and inflation taking a toll on home loan customers, banks are beginning to encourage them to partly prepay their loans. Many of them are doing so without charging them prepayment penalty.
State Bank of India, the country's largest bank, is encouraging prepayment without penalty clauses even if the consumer has crossed banks' annual prepayment limit, said P Nanda Kumaran, chief general manager, personal banking.
Rajiv Sabharwal, head of retail assets and rural banking, ICICI Bank, the country's largest private bank, said the move was designed to 'insulate home loan customers from rising interest rates'.
This move by banks follows increases in the repo rate, or the rate at which the central bank lends money to banks, and the cash reserve ratio, the percentage of deposits banks must keep with the central bank, two weeks ago.
With access to funds growing more expensive, most banks raised their lending rates 50 basis points to 100 basis points. SBI raised its rates by 50 basis points last week, and ICICI Bank and HDFC by 75 basis points.
Analysts said banks are looking at aggressively encouraging part-prepayment because of tight liquidity conditions and the high cost of funds. "Such prepayments will help banks to access cheap funds from consumers that can be redeployed to high interest earning segments like personal and corporate loans," said a banking expert.
ICICI Bank allows customers to prepay most of the home loan but makes it mandatory for the last 12 months' equated monthly instalments (EMIs) to continue. In other words, prepayment can be made for 14 years of, say, a 15-year loan.
Earlier, customers prepaying a loan attracted a prepayment penalty of 2-3 per cent on the amount paid (over and above the cap) because the financial institutional would lose out on the interest income. Consider for instance, a cap of 25 per cent on the loan amount that one can pay in a single year. If one pays say, Rs 50,000 over and above the cap, the penalty would be 2 per cent or Rs 1,000.
Kamlesh Rao, head of home and personal loans at Kotak Mahindra Bank, said, "Since the prepayment is being done on account of the rate hike, we will not charge any penalty."
Normally, there is an annual cap of 15 -20 per cent that customers can repay without any penalty. However, if a customer approaches Kotak Bank for a further repayment because of the recent rise in interest rate, we would not charge then any prepayment penalties.
Banks are not, however, following this penalty waiver indiscriminately. Public sector banks such as Bank of Baroda said when customers prepay to keep EMIs and tenure unchanged the bank takes a call on waiving the penalty on a case-to-case basis.
"We look at the source of funds. If the customer has taken another loan to prepay the home loan, we charge him a fee," said Nandan Srivastava, general manager, retail banking, Bank of Baroda.
