BFIs barred from charging prepayment penalty for loans below Rs 5m

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KATHMANDU, July 23: Nepal Rastra Bank (NRB) has issued a circular to bank and financial institutions (BFIs), restricting them from arbitrary charging their clients for service, administrative and other fees.

In the circular issued recently, the central bank told BFIs that the difference of administrative service charge, prepayment penalty and commitment fee between clients while floating loans of same type should not be more than 0.25 percentage point.

The new consumer protection measure comes in the wake of growing complaints from borrowers that BFIs are charging them exorbitant fee under various headings.

An NRB official told Republica that the new measures were introduced to make sure that BFIs do not have a free rein over collecting various charges from their clients. The central bank also believes that the new rule will end discrepancy in various fees that BFIs charge.

All other fees, except administrative service charge, prepayment penalty and commitment fee that a banking institution levy on borrower, must be adjusted in the interest rate, according to the new rule.

“We have issued a circular to regulate various types of fees that BFIs charge their clients. While our study has found that fees charged by our banks are lower than banking institutions of other countries, the new rule is aimed at further lowering the cost and ensuring transparency in various costs that borrowers have to bear,” Bam Bahadur Mishra, acting executive director at the central bank’s Banks and Financial Institution Regulation Department, told Republica.

The new circular also bars BFIs from collecting any prepayment penalty while repaying loans in advance from their clients with loan limit of Rs 5 million. The rule will offer respite for those borrowers who want to repay their loans before the schedule.BFIs collect up to 2 percent of penalty from borrowers who repay loans before the predetermined schedule.If a borrower wants to repay loans higher than Rs 5 million, including project-based financing, because of the changes in interest rates or conditions agreed during the loan disbursement, the bank will not be allowed to charge the prepayment penalty, according to the circular.

Similarly, the NRB has also told BFIs to levy commitment fee only if the borrower utilizes less than 60 percent of sanctioned loans annually.

Mishra told Republica that the BFIs will not be allowed to collect any hidden fee from borrowers. “If banks impose any charge higher than what has been prescribed, clients can file complaint at the NRB. In such case, the bank will not only have to refund such charges, but will also be liable for fine and other action,” he added.

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