Sunday, June 1, 2014

RBI Brings Cheer for Citizens!!!

The Reserve Bank of India has brought a lot of cheer for citizens of India. Of late, banks are being advised to implement newer regulations that would help the common man. The purpose of this article is to highlight a couple of those developments in the past few weeks...

No More - Pre-Payment Penalty for Floating Rate Loans

Yes, you read it right. The RBI has instructed all banks to abolish pre-payment penalties for all Floating Rate Loans. Banks charge up to 2% of the oustanding loan amount (Principal) as penalty on customers who close their loans ahead of time. Both Home Loans, Auto Loans, Personal Loans and Education Loans that are repaid with a floating rate of interest have been brought into this ruling.

What this means for you?

As customers, one of the biggest roadblocks towards closing loans is this prepayment penalty. Home Loans and Auto Loans are usually in lakhs and 2% of the loan to be paid as penalty would have a deep dent on our pockets. For a 10 lakh loan, we have to pay Rs. 20,000/- just as a penalty for repaying the loan ahead of time. However, with this new ruling, we dont have to pay huge sums of money to repay our loans. This is Awesome News as customers..

What this means for the Bank?

A banks main source of income is the interest the loan customer repays as part of the loan agreement. Banks usually plan their future income based on loan repayments and if you repay your loan ahead of time, they lose a lot of money that they might end up earning in future. So, they charge customers these kind of penalties to prevent them from closing off loans.

With the RBI Abolishing the prepayment penalties, banks would have to rethink their loan strategies to ensure that their future income doesnt get affected. At the end of the day the bank has to do what is best for their business and make sure they remain profitable. To know more about how banks work and how they are an integral part of our economy, you should check out my new book titled "The Most Comprehensive Financial Guide for Women". To check out a free preview of the first few pages of the book - "click here"

No More - Penalties for Not Maintaining Minimum Balance for Dormant Accounts 

The Reserve Bank of India has recently asked banks not to levy penalty for non-maintenance of minimum balances in any inoperative account. According to the RBI, a savings bank account is treated as inoperative/dormant if there are no transactions in the account for over a period of two years. Most Banks charge penalties if a dormant account does not have enough funds in the account.

The RBI has now proposed that, banks should limit services available on dormant accounts to those available to basic savings bank deposit accounts and restore the services when the balances improve to the minimum required level. This way, RBI wants to minimize penalties that are charged on customers.

What this means for you?

As customers, there are situations where we may end up in a position where we cannot operate our account. For ex: we may have to visit a foreign country due to official purposes and end up staying there for many years. During this period, our account back in India may end up with insufficient balance or inoperative. Banks charge hefty fines on customers who dont maintain sufficient balance in their accounts and customers end up paying that money for reviving their account to normalcy. With this new regulation, these penalties will go down significantly.

What this means for the Bank?

Any service that a bank offers its customers comes at a price. Banks usually expect customers to maintain a minimum balance so that they can utilize those funds to offset the charges they incur in order to provide services to customers at discounted prices. When a customer fails to do this, banks resort to penalizing the customer and in fact these fines & penalties form a decent chunk of their annual income. With this new regulation, they may have to rethink their fees & charges so that they can continue to make a profit...

Some last words:

As customers, these new regulations will bring a lot of cheer, esp. the one about prepayment penalties. So, lets hope RBI brings in more such news that would help out the common man...


  1. Hi, I have an education load from Canara bank worth 1.5 lakh. I don't know whether it is a floating rate loan or not. Will this be applied to it?

    1. Yes, its applicable to education loans too. Note that this rule is applicable - effective immediate.


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