Legal Question in Banking Law in India

If you have agreed in writing to the terms and conditions of taking over bank, you have to pay whatever charges they have stipulated. For prepayment on your own, no charges are leviable

28.09.2013

Dear Sir / Madam,

The following are the RBI guidelines for prepayment of loan by way of takeover of the loan by another bank :

Q. Can you repay your loan ahead of schedule? Is pre-payment of loan allowed?

A. Most banks allow you to repay the loan ahead of schedule by making lump sum payments. However, many banks charge early repayment penalties up to 2-3% of the principal amount outstanding. Prepayment penalty may vary according to the reasons and source of funds - if you obtain a loan from another bank for pre-payment the charges are usually higher than when you pay from your own sources. However, you may credit more than your EMI amount into your loan account on a periodic basis and bring down your interest burden as and when funds are available with you. Most banks do not charge a pre-payment penalty if you deposit more than your EMI payable on a periodic basis. Please check such stipulations while availing the loan.

Q. What are Switch over charges/ balances transfer charges?

A. When other banks reduce the interest rate, you may prefer to close your account with the bank with whom you are banking, to avail of the loan from the bank offering reduced rates of interest. You have to pay pre-payment charges for doing so. In order to ensure that their customers do not approach other banks for availing reduced interest rates, banks allow customers to switch over from a higher interest loan to a lower interest loan by paying a switch over fees which is lesser than the pre-payment charges. Generally switchover fee is taken as percentage of the outstanding loan amount.

YES, in keeping with the above, 4% prepayment charges by the bank is on the higher side. You should check and confirm the stipulations pertaining to prepayment charges as mentioned in your sanction letter, and accordingly initiate further action with the bank.

Regards,