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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

Meera, a salaried employee, has a floating-rate home loan from a scheduled commercial bank taken for personal, non-business purposes. She wishes to prepay the entire loan from her savings, but the bank demands a 2% prepayment charge on the amount prepaid. Under RBI's fair practices directions, what is the position?

The bank cannot charge a prepayment or foreclosure fee. RBI's directions prohibit such charges on floating-rate term loans to individuals for non-business purposes, and a clause in the sanction letter does not override that. Meera can close the loan without the 2% charge.

  1. AThe bank cannot levy a foreclosure or prepayment charge on such a floating-rate loan to an individualCorrect
  2. BThe bank may levy the charge if it is stated in the sanction letter
  3. CThe bank may levy the charge only if the prepayment is made from savings and not from a refinancing loan
  4. DThe bank may levy the charge only during the first year of the loan

Explanation

RBI directions bar banks from charging foreclosure charges or prepayment penalties on floating-rate term loans given to individual borrowers for non-business purposes, whether prepaid from own sources or otherwise. A contractual clause in the sanction letter cannot override this. So the 2% demand is not permissible.

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