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SANKARAN.G. (supdt.)     24 September 2009

Whether Banks can charge preclosure charges?

My sister had a ten wheeler lorry, financied by ICICI.  Now, when she approached the bank for the total dues to sell the vehcile,  they have charged 5.41% as pre-closure charges whcih came around Rs..22,000/-.    Whether they have the right to   penalise for preclosure? What is the legal point? Can she prefer a complaint with the ICICI authorities.  I solicit your valuable advice.


 10 Replies

aruntrivedi (lawyer)     24 September 2009

If it is in agreement as general term and condition they can charge pre-closure charges and once you have entered into an agreement you have to pay. Loans these days are given with certain conditions and all written in small antanckle letters - people do not read or study and simply blindly sign - if it is within said all terms and conditions you will have to pay otherwise they want close yr account and continue charge some amount with hidden charges.

1 Like

SANKARAN.G. (supdt.)     25 September 2009

Thank u Mr.Trividei.   Whether it is of any relevance to this case to the judgement given by Supreme Court  SBI Vs. Usha Vaid SLP(C) 16345 of 2007. 

Shree. ( Advocate.)     26 September 2009

Dear Sir,

Go through the below news item:

ICICI Bank levies ‘foreclosure’ charges on loan, to compensate;

Express News Service

Posted: Apr 25, 2009 at 2237 hrs IST

Chandigarh The District Consumer Disputes Redressal Forum has directed the ICICI Bank to pay Rs 50,000 as penalty for causing harassment to a loan applicant by levying foreclosure charges on the  homeloan he had applied for.

The  bank has also been directed to refund Rs 2,71,289.45, which they charged as foreclosure charges in addition to Rs 5,000 towards costs of litigation.

The complainant, Sanjay Kumar Garg, was disbursed a home loan of Rs 1.30 crore, which was to be paid back in 120 monthly installments of Rs 1,74,813 each, with a floating rate of interest at 9 per cent per annum.

The complainant averred that he paid 33 installments up to July 31, 2008 and then wrote a letter to the bank seeking details of the exact balance left to be paid.

He was asked to deposit Rs 1,24,62,655.28, including Rs1,20,93,55 as principal outstanding amount, Rs 97,000 as interest up to July, 2008, and Rs 2,72,104.88 as foreclosure charges at the rate of 2.25 per cent.

He requested to waive off the foreclosure charges, but to no avail. The loan account was finally closed when the complainant paid Rs 1.25 crore.

In its reply, ICICI Bank said the foreclosure and pre-payment charges were accounted for according to the terms and conditions of the loan

Ruling that “foreclosure” and “pre-payment” are not interchangeable words, the forum said the counsel for ICICI could not produce any agreement under which the complainant was liable to pay the said charges.

“There is no agreement for paying any fee or charges in case of foreclosure. The bank asked for foreclosure charges, which is beyond the terms of the agreement,” held the forum.


1 Like

SANKARAN.G. (supdt.)     26 September 2009

Dear Sir

  Thank u  for bringing  out the foreclosure on home loan account for the benefit of many readers like me.  I would solicit your valuable advice is it applicable for the Commercial Vehcile loan ? whether the same analogy can be applied? or  will they  shield under the fine print running in to pages before sanctioning the loan?


Shree. ( Advocate.)     27 September 2009


Whether a bank can charge money in the name of foreclosure charges in case of prepayment of personal loan if it is being repaid in 14th month when the entire loan is repayable in 36 months? If yes, whether such charges can be 5.62% at O/S Principal?”

We have not issued any guidelines regarding foreclosure charges. In the context of granting greater functional autonomy to banks, operational freedom has been given to banks on all matters pertaining to service charges on banking transactions. Accordingly, with effect from September 1999, banks have been given the freedom to fix service charges for various types of services with the approval of their respective Boards. However, banks have been advised that while fixing service charges, they should ensure that the charges are reasonable and not out of line with the average cost of providing these services. Further, the management of loan recovery activity in a bank is essentially an internal management function and each bank's Board is authorized to frame suitable policies in this regard.



2 Like

Shree. ( Advocate.)     01 October 2009

RBI against banks slapping penalty on loan prepayment:

NEW DELHI: The Reserve Bank of India has frowned on the practice of banks slapping penalty charges on premature repayment of loans, saying it did not approve of such charges. However, it stepped back from any role in actually enforcing its point of view.

Replying to a query filed under the Right to Information Act, the central bank said, "RBI does not approve of charging penalty or foreclosure charges. We have advised banks to lay out appropriate internal principles and procedures so that usurious interest including processing and other charges are not levied by them on loans and advances."

The central bank also admitted that it had received complaints on charging of penalty on premature payment of loans by banks who had been "suitably advised". But RBI was silent on what action had been taken against banks who refused to follow the advice. The charges disadvantage those wanting to either pay off a loan or move to one offering better terms.

Even though most banks operating in India impose such charges, RBI's reply to the RTI query noted, "In the context of granting greater functional autonomy to banks, operational freedom has been given to scheduled commercial banks on all matters pertaining to banking transactions, including foreclosure of loans."

The applicant asked RBI if it was aware of private and multinational banks levying foreclosure charges or penalties for premature payment of loans and what steps had been taken in this matter. RTI activist Subhash Chandra Agarwal also asked what steps had been taken by RBI to ensure that uniform interest rates were charged by all banks.

For credit card operations, RBI has advised banks to formulate a well documented policy and a fair practice code that charges interest rates that could depend on the payment or the default history of the cardholder. "There should be transparency in levying of such differential interest rates... banks should upfront indicate to the credit card holder, the methodology of calculation of finance charges with illustrative examples, particularly in situations where a part of the amount outstanding is paid by the customer," RBI's CPIO said.

The central bank said in order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. "Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate," it said.

(22 Sep 2009)Times of India



V.T.Venkataram (Advocate and Consumer Activist)     06 October 2009

If the original agreement (contract)provides for "preclosure charges" as per bank rules, then no consumer complaint lies.

Please verify the original agreement( contract). .

As per Section 2(1)(g) of the Consumer Protection Act, 1986,

 "deficiency" means any fault, imperfection, shortcoming or inade­quacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service;


SANKARAN.G. (supdt.)     06 October 2009

You are absolutely right, but, in the case between SBI &Dr.Usha Vaid, the National Consumers Disputes redresal forum has given a verdict though the preclosure clause is there, it is Unfair Trade Practices and asked SBI to refund the same.  SBI went for slp (c)16345 of 2007 and SC has upheld the order. With this backdrop, can we ask ICICI to refund.

girishankar (manager)     27 February 2010

Thanks Sirs

Paritosh Mewar (Lawyer)     31 March 2010

If your sister is paying out of her own funds then the Bank cannot charge foreclosure charges. In case it is take over of loan by another bank  then the bank may chrge.

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