Prevention and is better than the cure : RBI governor

RBI governor D Subbarao

The Indian banking regulator RBI (Reserve Bank of India) has asked banks not to impose pre closure charges on floating rate home loans as it would transfer only interest risk to the borrower and not the credit risk. Banks can, however, impose foreclosure charges on fixed rate home loans.

According to RBI press release, “Banks may address their asset liability mismatch issues by recourse to the interest rate swaps market. Floating rate loans pass on 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.

Along with IBA (Indian Banks' Association) RBI would examine issues of mental harassment of bank customers and monetary compensation for customers with special grievances.

The release also   said , “Issues that may receive attention in the analysis would be: Whether only actual loss should be considered for compensation; whether mental harassment issues can be codified for compensation and whether compensation should be capped,. The RBI would also determine whether policies of bank boards on compensation should include mental harassment as a ground for compensation.

These decisions were taken at the annual conference of banking ombudsmen held at RBI's headquarters in Mumbai on recently, which was inaugurated by RBI governor D Subbarao.
Subbarao said, “Rendering good customer service is like prevention and is better than the cure, which is various grievances redressal mechanisms.“

will eventually have to implement these directives of the RBI. The issue of compensation for mental harassment came up as a bank customer was demanding Rs 4 crore compensation from a mid-sized bank in a dispute over Rs 10,000.

Highlights

* Besides the decision on home loans, the action points include measures to protect customer interest in unauthorized ATM transactions, and a policy for compensation to customers for mental harassment.

* In case of dispute on ATM transaction, onus on bank to prove customer mistake

*  Data on important awards made by ombudsmen in customer complaint cases to be made public

*  Banks to provide one view of all bank accounts of a customer online

* Banks to mail TDS certificates to customers

* Banks’ code of ‘fair practices to customers’ to include minimum insurance for card transactions and communication of all-in costs

* Banks must not recover prepayment charges in floating rate loans and make available fixed rate loans Banks can offer long-term fixed rate loans

* Banks must not recover pre-payment charges on floating rate loans. Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage these. Banks only substitute interest rate risks with potential credit risks.
* Banks to offer long-term fixed-rate housing loans to customers and address their asset-liability mismatch issues by turning to the Interest Rate Swaps market. However, banks can charge pre-payment penalties in the case of fixed-rate loans.
Retail loans are very often priced on floating rates. In India about  80%t of outstanding home loans are floating rate loans. The pre-payment penalty clause has long been a target for criticism from consumer groups and the banking regulator.
India’s largest private sector bank, ICICI Bank, introduced two home loan products, with interest rates fixed for one and two years, respectively. The country’s largest mortgage finance company, HDFC, followed suit, which announced a dual-rate scheme on Monday, offering home loans at a fixed rate for the initial three or five years and at a floating rate thereafter.

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