Neeraj Malhotra vs Deustche Post Bank Home Finance Ltd. And Ors.

The information filed by Shri Neeraj Malhotra in case No. 5/2009 relates to the pre-payment penalty on home loan. Another information filed by Shri Surinder Bhakoo to the Commission against HDFC Bank Ltd relating to car loan was clubbed with the case no 5/2009 by the order of the Commission dated 6.4.2010. The case No. 5/2009 relates to prepayment penalty on home loan whereas the case No. 15/2009 pertains to car loan. Both the cases, thus, involve consideration of different aspects/issues for deciding the matter.

Therefore, case No. 15/2009 stands separated and is no longer clubbed with case No. 5/2009. The order in this matter (case no 15/2009) shall be delivered in due course of time.

In this matter (case No. 5/2009) the Chairman had already recused himself.

All the Members of the Commission unanimously held that there is no violation of Section 4 The majority decision given by four Members of the Commission holds that banks/HFCs have not violated Sections 3 and 4 and thereby closed the matter.

Members, Mr. P.N. Parashar and Mr. R. Prasad gave separate dissenting orders. As per the dissenting orders, opposite parties are found to have contravened the provisions of Competition Act 2002.

Member, Mr. Prasad held that the banks and the home loan companies have contravened the provisions of Section 3(1), 3(2), 3(3) and 3(4) of the Competition Act and has issued orders under Section 27 directing all the banks and HFCs operating in India to stop all such agreements with the customers relating to charging of prepayment of penalty or foreclosure fees etc. and not to enter into an agreement with the customers relating to such prepayment penalty/charges. He further directed banks/HFCs to refund all the prepayment charges or foreclosure fees to the customers, who have repaid the loans after 20th May, 2009.

Member, Mr. Parashar in his dissenting order found that opposite parties have contravened Section 3(1), 3(3)(a) and 3(3)(b) of the Act and passed order under Section 27 directing opposite parties to discontinue forthwith with the practice of charging closure charges and further directed them not to re-enter, directly or indirectly, into such agreements/decisions or practices in future The order is delivered on this 2nd day of December 2010.

The Secretary is directed to send copies of orders to the concerned parties.

The present information has been filed under Section 19(1)(a) of Competition Act, 2002 (the Act) by informant Neeraj Malhotra, against banking and non banking financial companies for the levying of Prepayment Charges on the prepayment of amount of home loan taken. The opposite parties are private and public sector banking and non-banking financial institutions, engaged in the business of offering different types of loans including retail home loans, to the general public. Before examining the various elements of the alleged violation of the provisions of the Act , the findings of the Director General during investigation and the contentions of the Opposite Parties, it is necessary to look at the overall environment prevailing in the retail home loan market.

BACKGROUND

Retail home loan market in India

1.1 Housing market in India took off mainly since the year 2001, as evidenced by the growth in bank exposure to the sector. The rapid growth in housing loan market has been supported by the growth in the middle class population, favorable demographic structure, rising job opportunities in the metropolitan centers, emergence of a number of second tier cities as upcoming business centers, IT and ITES related boom and rise in disposable incomes. Furthermore, attractive tax advantages for housing loans make them ideal vehicles for tax planning for salary earners.

1.2 The real estate market has also grown rapidly recording considerable annual price appreciation in recent past. The real estate market has also been boosted by the proposal to permit 100 per cent FDI in the sector. For banks and other housing finance institutions, the regulatory framework enabled expansion in house loan portfolios given the helpful prescriptions on risk weights for housing exposures and the benefits of compliance with the regulatory targets mandated for priority sector lending. Besides, housing loans growth by financial institutions has been assisted by the comfort of relative safety of such assets given the tangible nature of the primary security and the comfort obtained from The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.

1.3 One of the most significant factors that drove the growth of housing market in India in the recent years was the easy availability of bank finance at affordable interest rates owing to surplus liquidity with the banking sector coupled with the softening of interest rate environment on the back of lower inflationary expectations.

1.4 With the increase in the consumer demand and to fill the demand supply gap, many financial institutions emerged providing lending services at attractive interest rates. There are two different types of lending institutions viz., Banks and Non Banking Financial Companies (NBFC). The banks apart from lending can accept deposits of current and savings accounts and fixed deposits, whereas an NBFC can only accept fixed deposits and also lend.

1.5 There is no interest paid to the balances of current accounts and for savings accounts the rate of interest paid is 3.5% p.a on a daily balance basis. When there are sufficient balances in these accounts the bank would not require to approach any other financial institution for relending purposes. In addition to these current and savings account (CASA) balances, if needed bank can source the funds through fixed deposits for a short term of 15 days to as long as 10 years. The banks also raise funds from National Housing Banking Finance and other financial institutions for relending purposes.

1.6 NBFC source their funds primarily through other financial institutions and fixed deposits. Since they don't undertake the business of CASA operations through which the cost of funds would have been cheaper, the NBFC generally offers higher rate of interest to the fixed deposit holders. Also the lending rates of the NBFC are generally higher.

Home loan market composition:

1.7 The Indian home loan market is catered by many public sector and private sector banks along with the Housing Finance Companies (HFC).HFCs are the Non Banking Financial Companies. According to the report of ICRA in their report dated June 17,2010 "Performance Review of Housing Finance Companies and Indian Mortgage Finance Market for 2009-10 and Industry Outlook", the major players in the home loan market are HDFC with 17% (along with HDFC Bank), State Bank of India (SBI) 17%, ICICI Bank 13%(along with ICICI Home Finance), and LIC Housing Finance (LIC HFL) with 8%, account for 55% of the total housing credit in India (as of March 31, 2010). Apart from these big players, there are some HFCs with relatively smaller credit portfolios operating in their respective areas or serving niche customers. Small HFCs over the past few years are growing their portfolio considerably.

1.8 Credit portfolio of the HFCs as well as scheduled commercial banks year wise from 2004 is given below:

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

HFCs

3540

4680

5980

7340

9120

11050

13410

SCBs

8940

13470

18520

2310

25570

27240

29720

Total

12490

18150

24500

3044

34680

38290

43130

Rs. In crores

1.9 According to the ICRA report credit growth in the Indian mortgage finance market improved to 12.6% in 2009-10 from 10% in the previous fiscal drawing on several factors, including a healthier operating environment, expectations of appreciation in property prices, and attractive interest rate schemes offered by banks and housing finance companies (HFCs). Although housing loans remain the main source of revenues for small HFCs, the proportion of other loans in their loan book increased to 8% as on March 31, 2010 from 7% the previous fiscal.

Factors affecting non-price competition in retail home loan market:

1.10 In this decade business of home loan market has grown rapidly with many players forayed into this business. In this regulatory environment where the interest rates are almost similar across the banks adhering to the prudential norms of the central bank, increasing the customer base by improving the service standards became a practice. These can be said as non-price competitive factors which are as under:

1) Providing the loan to the customer depending on the need of the customer by providing an option for loan on either fixed or floating rate of interest rates.

2) The technical support provided to the borrower in choosing the home w.r.t choosing the property in the desired market, making the customer aware about the prevalent market prices and also assisting in getting documents from the builder by checking its authenticity.

3) Depending on the risk appetite of the banks about its customers, some of the guidelines are liberal to some credit worthy customers, without asking for the guarantor or reducing the margin money for availing the loan. This was help to many customers who are credit worthy buyers but without any guarantor.

4) Helping the customer with door step service without asking him to visit the branches for their procedural works. The busy customers would be interested in this type of services.

Types of home loans:

1.11 There are two types of home loans. One is the fixed rate loan and the other is the floating rate loan. In the fixed rate loan, whatever interest is fixed on the start of loan is carried on for the complete period. However, for the other the interest rate is not fixed and is completely dependent upon the market forces. As the interest rate goes up or comes down the burden is transferred to the person and the Equated Monthly Installment (EMI) fluctuate accordingly. Also there can be an increase or decrease in the tenor of the loan depending on the rise of the interest rates. In these fluctuating market conditions banks are more interested in offering floating rate than the fixed rate products.

Factors influencing interest rates:

1.12 Home loan interest rates are dependent largely on the monetary policy of the RBI. The rate of interest would be influenced by the increase/decrease in the repo rate, reverse repo, statutory liquidity ratio (SLR) and cash reserve ratio (CRR). These terms are explained below:

Cash Reserve Ratio(CRR):

1.13 Cash Reserve Ratio is the amount of mandatory funds that commercial banks have to keep with RBI. It is always fixed as a percentage of total deposits. These deposits are designed to satisfy cash withdrawal demands of customers. CRR is also called the Liquidity Ratio as it seeks to control money supply in the economy 1.14 The higher the cash reserve (CRR) required, the lower the money available for lending. The bank has to compulsorily keep a part of the deposits of the customers' accounts with the RBI. Hence this reduces credit expansion by controlling the amount of money that goes out by way of loans.

1.15 CRR can be used as a tool to bring down inflation which happens due to excessive spending power. Spending power is augmented by loans and if money that goes out as loans is controlled, inflation can be tamed to some extent.

Statutory Liquidity Ratio (SLR):

1.16 SLR is the portion that banks need to invest in the form of cash, gold or government approved securities (Bonds) before providing credit to its customers. The quantum is specified as some percentage of the total demand and time liabilities of the bank and is set by the Reserve Bank of India.

1.17 Time liabilities are the fixed deposits of the customers with a bank for a fixed tenor whereas demand liabilities are the fund balances available in the saving and current accounts of the customers.

Repo rate:

1.18 It is basically the rate at which RBI lends to commercials banks for meeting the short term deficits. Repo Rate is the interest rate for secured overnight or short term financing involving repurchase of securities. A reduction in the repo rate will help banks to get money at a cheaper rate.

Reverse Repo rate:

1.19 It is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are comfortable to lend money to RBI as their funds are in safe hands with a good interest rate. An increase in Reverse repo rate can make the banks transfer more funds to RBI due to attractive interest rates. It can likely to cause the money to be drawn out of the banking system.

Prime Lending Rate (PLR):

1.20 Interestrate charged by banks to their largest most secure and creditworthy customers. This is fixed by each bank by taking into account cost of funds administrative expenses allowances of maintaining reserve requirement and reasonable margin of profit.

Levy of Prepayment charges:

1.21 The levy of prepayment charges for the foreclosure of the home loans is prevalent in many banks. The prepayment decisions of a borrower is a function of movements of rates of interest, known as cyclical pre payments and rising income level, known as structural pre-payments. Cyclical prepayments are those prepayments in which because of the drop in interest rates the borrowers shift from one loan to another loan which is offered at a lesser interest rate. The structural prepayment is foreclosure of the loan with the personal funds available with the borrower. This can be due to the rising income level of the borrower and foreclosure is done with his personal savings. Hence in a rising interest rate scenario there would be more structural than the cyclical prepayments and vice versa when the interest rates are falling.

1.22 The facts of the instant case have to be viewed in the background of retail home loan sector outlined in the foregoing paras.

ESSENTIAL FACTS OF THE INFORMATION

The informant alleged that the Opposite Parties are following a practice and taking decisions in concert for levy of prepayment charges ranging between 1% to 4% of the outstanding principal amount of the loan/ interest, for the balance unexpired period of the loan.

The informant has alleged that the above prepayment charges are being levied if borrowers are prepaying the loans for refinancing its loan from another bank/NBFC at cheaper rate of interest. As per the informant the said practice of levying of prepayment charges discourage/ prevent the borrower from switching over to another enterprise which is offering loan at lower rate of interest. The informant also alleged that the said banking and non-banking financial institutions are charging penal interest towards prepayment charges on the entire loan amount and not only on the outstanding loan amount.

As per the informant the same also results in increasing the effective rate of interest on which the loan was earlier availed by the borrower. In certain cases, the terms of the agreements entered into and executed by the above banking and non-banking financial institutions did not even reflect the clause for prepayment charge yet the same is charged. The informant alleged that the said banking and non-banking financial institutions are therefore not allowing the borrower to opt out without payment of prepayment charges/penalty.

The informant further alleged that agreement and understanding entered into between the above enterprise/persons or the practice carried on or the decision taken by the above enterprises/persons who are engaged in the supply of the similar kind of services, has the effect of determining prices of the services being supplied by them. The levy of prepayment charges/penalty has the effect of increasing the actual interest rate initially agreed upon by the client. According to the informant this has the effect of indirectly determining the prices of the services of home loans provided.

In addition to the above, the practice also limits the supply/provision of services, as the client is unable to opt for another source of loans. This results in an Appreciable Adverse Effect on Competition (AAEC) within India.

The informant also alleged that the above enterprises/persons are also abusing their dominant position within the public domain by imposing unfair and discriminatory conditions in purchase or provision of services (i.e. loans). The practice of charging prepayment charges/penalty prevents borrowers from switching over to competitors offering lower rate of interest. It also has the effect of driving existing competitors of the above enterprises/persons out of the market as also causing foreclosure of competition by hindering their competitors' entry into the market.

The Informant had filed the instant information against the following 4 entities.

(i) Deustche Post Bank Home Finance Limited (Deustche Bank)

(ii) HDFC Limited (HDFC)

(iii) HDFC Bank Limited (HDFC Bank)and

(iv) LIC Housing Finance Limited (LIC Housing)

The information alleged that the acts/practices carried on and decision taken by opposite parties are violative of provisions of the Section 3(1), (2) & (3)(a) and (b) read with Section 4(1), (2)(a)(i) of the Competition Act, 2002 (the Act).

The informant had prayed for the following reliefs:

(i) To inquire into above mentioned contravention of the provisions contained in Section 3(1), (2) & (3) (a) & (b) read with Section 4(1), (2(a)(i) of the Act.

(ii) To order the enterprises/persons as mentioned above to discontinue the practice of charging prepayment charges/penalty, not to reenter into the above agreements and also to discontinue the practice and the decision taken by them leading to indirect determination of the sale prices of the services rendered by them.

(iii) To order the above said enterprises/persons to discontinue imposing unfair and discriminatory conditions in purchase of services by their consumers, which amounts to abuse of their dominant positions.

(iv) To further penalize the above enterprises/persons for the above violations to the extent of 10% of their average turnover for the last three preceding financial year;

(v)To pass such further orders as it deems fit and proper in the facts and circumstances of the present case.

INVESTIGATION BY THE DG

The Commission considered the matter and having formed an opinion under Section 26(1) of the Act that there exists a prima facie case, referred the matter to the Director General (DG) for investigation vide order dated 10.09.2009. In absence of any substantive evidence in support of the allegations, the Commission did not deem it fit to grant any interim relief.

11.1 The DG after receiving the direction from the Commission got the matter investigated by the Deputy Director General (DDG) and submitted the report dated 16.12.2009 to the Commission.

11.2 in the report of DG, it has been reported that the practice of charging prepayment charges/penalty, having been followed by almost all the banks engaged in providing retail home loan, the scope of the investigation was enlarged by the DG examine other banks in addition to the banks mentioned by the informant:

1 Allahabad Bank

2 Canara Bank

3 Corporation Bank

4 ICICI Bank Ltd. (ICICI)

5 Indian Bank

6 Indian Overseas Bank (IOB)

7 Oriental Bank of Commerce (OBC)

8 Punjab & Sind Bank ( P&S Bank)

9 Punjab National Bank (PNB)

10 State Bank of Hyderabad (SBH)

11 State Bank of India (SBI)

12 Vijaya Bank

11.3 Duringthe investigation certain information had also been sought from the Reserve Bank of India (RBI) and the Indian Bank Association (IBA). As per the report, following questions were found relevant for the investigation:

i. What is the practice which is allegedly anti- competitive and violative of Section 3 and 4 of the Act?

ii. What is the origin and history of this practice?

iii. What are the justification for this practice either at present and when it was started?

iv. What is regulatory status? Are any regulatory authorities such as RBI looking into it and has it been ever been examined?

v. Legal position-has such a matter ever been agitated in court of law earlier? If yes, what is the present status?

vi. International practices: What are the practices elsewhere? Is this practice prevalent in other jurisdictions?

vii. Violation of competitive law, if any.

11.4 As per the DG report, on perusal of the replies and circulars received from the banks/financial institutions (including RBI & IBA) issues for investigation were as under:

(i) Issues related to Asset Liability Management (ALM) of the banks/Financial institutions.

(ii) A regulatory framework on pre-payment penalty by RBI and National Housing Bank (NHB).

(iii) Legal status of the issue in the light of various judgments by Indian courts/commission related to pre-payment penalty.

(iv) Master circular on finance for housing schemes of RBI.

(v) International practice with regard to pre-payment penalty.

FINDINGS OF DG

In the Investigation Report of DG it has been reported that IBA conducted a meeting of its members on banking issues related to commitment and prepayment charges in 2003. The DG office requisitioned the background note circulated before the meeting, agenda of the meeting, issues deliberated in the meeting, minutes of the meeting and any circular/ notice issued to the members after the meeting. IBA vide letter dated 09.11.2009 submitted that

"Pursuant to regulatory prescription laid down by RBI in 1990, a system of levying 1% commitment charges on unutilized portion of Working Capital operating limit was introduced in the banking system. However, later on when the RBI had withdrawn the credit control guidelines issued to the banks and left the matter of levy of commitment charges to the discretion of financing banks and in view of the increased competition in the lending field, banks have framed their own guidelines on levy of commitment charges. The issue of commitment charges was discussed by the Managing Committee of IBA at its meeting held on 28 July, 2003. The Committee deliberated on the pros and cons of IBA making a suggestion to its members for reintroduction of the practice of levying commitment charges on the unutilized portion of working capital limits sanctioned to borrowers. In the next meeting of IBA held on 28 August, 2003, some of the members pointed out that the international practice was in favour of levying commitment charges. It was also pointed out that under the proposed Basel II norms on fixing economic capital, banks would be required to allocate capital in respect of committed lines of credit though not actually disbursed. At the meeting, the need for a common approach in fixing prepayment charges on loans was also suggested by some of the members. After detailed discussion, the Committee while fully appreciating the market dynamics decided that a suitable communication be sent to member banks bringing out the view points expressed by the members so that the member banks could take a decision on levy of commitment charges and prepayment charges

12.1 Based on investigation, DG's report stated that:

i. The contention that the prepayment charges are needed for Asset Liability Management is not sustainable.

ii. Imposition of prepayment levy by National Housing Bank was a business decision and could not be anti-competitive.

iii. The fair practice guidelines of RBI do not encourage usurious charges.

iv. Just mentioning of prepayment penalty on the website of banks does not help the borrower to get out of the trap.

12.2 Upon investigation of facts, the DG concluded that:

i. The allegations regarding violation of Section 3(1), (2) read with Section 4(1), (2) (a) (i) are found to be untrue. Also with regard to allegation that the entities are levying pre-payment charges on the entire loan amount and not on the outstanding loan amount is found to be untrue as all the entities mentioned by the information provider are charging pre-payment penalty on the outstanding principal at the time of pre-payment and not on the entire loan amount

ii. The allegation that the banks are imposing pre-payment penalty/charges are found to be true. Further, with regard to allegation for violation of Section 3(3)(a) & (b) made by the information provider, violation of Section 3(3)(b) of the Act is found to be true.

iii. In context to Section 19(3) of the Act, levying of pre-payment penalty creates a barrier to new entrant in the market in way that if the new entrant is providing competitive/lower interest rates, better services etc. the borrower of the existing banks can only avail the services of the new entrants by incurring additional cost in the form of pre-payment charges. Levying of pre-payment penalty by banks makes the exit expensive thus acts as a deterrent for a borrower in availing the best prevailing interest rate of other bank/financial institution.

iv. It is noted from the meeting of IBA that the group of banks have come together and taken a collective decision to limit market competition and to generate fee based income. The said collective decision of bank is beneficial to banks and on the contrary is anti-consumer and anti-competitive. In view of above, levying pre-payment charges by banks violates provision of Section 19(3)(a) (c) and (d).

Replies filed by Opposite Parties After receipt of their DG report the Commission issued notices to all the above 16 parties vide the order dt. 05.01.2010 to file their reply/objections to the findings of the DG. The GIST OF replies/objections filed by the banks are as follows:-

13.1 Opposite party No. 1,DEUTSCHE POST BANK HOME FINANCE LIMITED: It has been submitted in the reply/objections by Opposite party No. 1 that:

i. Prepayment directly affects the asset liability management of the bank. In the rising interest rate situation the bank loses interest which the bank would have collected if the customer had not prepaid the loan and as the unexpected inflow of funds takes times for its utilization, the bank loses interest on such surplus fund also. In order to compensate such opportunity loss, the bank charges prepayment charges from its customers in the event of foreclosure of the loan.

ii. The refinancing bank National Housing Bank (NHB) also charges the prepayment levy.

iii. There has beenan increase in numbers of instances where customers have prepaid the loan in the initial years of loan tenure or have decided to switch over to some other lender, such a situation makes home loan market very volatile with customers moving from one HFC/bank to the other or vice-versa, this leads to high escalation of fixed and other associated costs. Such unprecedented increase in cost affects the overall wholesale business of the bank. Therefore, in order to prevent volatility and the capture increase in cost the bank imposes the prepayment charge which is not penal in nature but is aimed to regulate its cost of funds.

iv. Fair practice guidelines of RBI permits freedom to levy such charges and it is transparent in terms of the guidelines of the RBI as the customers knows before signing of the agreement that he has to pay prepayment charges the bank. It cannot be said that levy of prepayment charges is a non-service based usurious charge.

v. In Usha Vaid's case, the Consumers had raised a dispute on the ground that prepayment amount of Rs. 42,300/-was charged in spite of the fact that the State Bank of India had advertised that no prepayment charges would be levied in loan take over case. The learned State Commission, Delhi while deciding the above said dispute also observed that request for transfer of loan amount cannot come within the ambit of "prepayment" as it has to be deemed a case of "take over". It is for this reason that the appeal of the State Bank of India was dismissed. The State Bank of India challenged the said order till the Supreme Court of India but the Supreme Court also did not interfere with the said order, but the same does not imply that the issues of levy prepayment charges stands settled. This does not by itself render the levy of prepayment charge anti competitive in terms of Section 3 (3) of the Act. International practices on the levy of prepayment charges conclusively indicate that the levy of prepayment charges is a universally accepted norm but the charges thereof are determined by each individual state bases on its economy situation and the housing loan business.

13.2 Opposite party No. 2, HDFC LIMITED: The Opposite party No. 2, HDFC has submitted in it's reply that:

i. The bank has not violated the Section 3(3) of the Act.

ii. The DG has alleged an agreement only by virtue of the meeting of IBA, which was held sometime in Aug-Sept 2003. HDFC is not a member of IBA at present nor has it been a member for at least the past two decades . HDFC did not attend the alleged meeting of IBA and had never received the alleged IBA circular dated 10.09.2003, which DG seeks to rely on to substantiates its claim regarding agreement between HDFC and other bank/HFCs. HDFC's decision to levy prepayment charges was unilateral business decision taken in 1993 much before the imposition of prepayment charges by any other banks/HFCs named in the DG's report.

iii. The aforesaid facts make it clear that the allegation of violation of Section 3(3)(b) of the Act is baseless qua HDFC. The DG's Report does not have any other evidence which, even remotely, suggests that HDFC imposed prepayment charges based on an agreement with other HFCs or banks.

iv. It is submitted that, the DG has not produced any evidence to prove that a. HDFC was part of any agreement with other financial institutions to levy prepayment charges, b. or HDFC ever attended the meeting where the prepayment charges were allegedly discussed in 2003, c. the IBA circular dated September 10, 2003 was addressed to HDFC, and (4) that HDFC received IBA circular dated September 10, 2003 and HDFC acted upon it. The DG has failed to appreciate that since HDFC is not and has not been a member of the IBA anything said and done in the IBA cannot be imputed to it. Thus the only basis on which the DG alleges an agreement between HDFC and the banks/HFCs is inapplicable to HDFC.

v. Prepayment can lead to number of different types of costs and losses for the lenders, and there are advantages to the borrowers who have prepayment charges in their contracts as opposed to the borrowers which choose not to have such clauses. Borrowers with prepayment charges clauses in their contracts are likely to pay lower rate of interest as opposed to the borrowers which do not have prepayment clauses. The DG's report states that the practice of levying prepayment limits/controls supply of funds in the loan market.

vi. It further alleges that levying of prepayment charges results in foreclosure of competition and causes consumer harm. It is submitted that the DG has not adduced any evidence or any economic analysis which suggests that the levy of prepayment charges has resulted in decrease or controlling the supply of home loans in the Indian market. The levy of prepayment charges does not reduce consumer welfare but to the contrary is likely to be welfare enhancing.

vii. NHB imposes prepayment charges on the institutions that it lends to, including HDFC. If the prepayment charges imposed by the NHB are not anti competitive, equally prepayment charges imposed by HDFC cannot be anti competitive. RBI's various guidelines and practice codes do not question the justification of the imposition of the prepayment charges and neither do they ban levy of such charges. International practice is not in favour of restriction on prepayment charges.

13.3 Opposite party No. 3, HDFC BANK LIMITED: The opposite party No. 3,HDFC bank in it's reply submitted that:

i. HDFC Bank Limited does not grant any home loan. The question of inclusion any prepayment clause on home loans does not, therefore, arise.

ii. The action of levying charges and interest by bank is an occupied statutory and regulatory field of RBI.

iii. The bank has a practice of levying prepayment/foreclosure charges to its customers in the event of the customer voluntarily opting to foreclose/prepay his loan before the contracted tenure of the loan.

iv. Prepayment/Foreclosure charges (as may be applicable) are levied on the loan outstanding amount at the time of the prepayment/foreclosure.

v. Levy of such prepayment/foreclosure charges is a prevailing market practice adopted by most banks/loan providers. Such charges are nominal and are levied to cover the expenses incurred on cost of sanction, booking, maintaining the loan account and to manage asset liability mismatch.

vi. Banks do not create money on their own. In order to lend money, it accepts deposits from public or further takes loan from other institutions at a fixed or floating interest as the case may be. Thus while advancing loan the bank has taken into account the cost of funds, thus obtained by the bank from the public and other financial institutions. In case of prepayment, the liability of the bank remains unaffected towards the depositors as well as financial institutions from which it borrowed money.

vii. Further, prepayment creates surplus funds, which remains unutilized for certain period of time and thus increase working cost of funds of the bank, hence, the banks are entitled to recover prepayment charges, which is the fee towards services provided by the bank.

viii. There is no violation of the Act. When there is no contravention of Sub-section( 1) of Section 3 and Sub-section (1) of Section 4 of the Act, nothing in inquiry under Section 19 survives . How the practice by banks can be anti competitive when with regard to an NHB, it has been held in the DG report that it is a business decision and cannot be anti competitive. Only 16 companies, banking and non-banking financial institutions are called upon to file responses. There are various other financial and non-banking financial institutions, which are operative in this country, there cannot be any adverse direction unless, all those banking and non-banking financial institutions are issued notice by Hon'ble Commission.

13.4 Opposite party No. 4, LIC HOUSING FINANCE LIMITED: The Opposite party No. 4, LIC housing finance limited in it's reply submitted that:

i. Prepayment charges levied within reasonable limits cannot be termed as usurious charges.

ii. The practice of levying prepayment charges has not been practically prevented a customer from shifting his Page 30of 170 loan from one institutions to another as is observed by a number of takeover of loans happening in our country.

iii. The prepayment charges by LIC Housing Finance Limited is for the purpose of covering financial strain/cost of the company that is arising due to premature closure of loan and not to prevent customers from availing loans from a lender of their choice.

iv. Subsequent to the introduction of prepayment charges by LIC Housing Finance limited in 1995, many banks and financial institutions have entered into the housing finance industry and some of them are having top market share in the industry, which, in itself, is reasonable evidence to disprove the contention that prepayment charges prevents new entry into this industry or prevents their business development.

v. The compounded annual growth rate of the housing finance industry is over 30% over the last 10 years, one of the highest growth achieved by any industry in the country, which points to the fact that prepayment charges have not in any manner acted against growth of the industry, rather it has only brought in stable, robust development of the country.

vi. In general the need for such levying is acknowledged by RBI and the amount to be levied is left to the fair discretion of respective financial institution.

vii. NHB raises long term funds, LIC Housing Finance Limited which is promoted by a 100% Government owned Corporation, also raises funds for longer duration. As the NHB finances only a part of our funds requirement, the balance raised from other sources also entails condition of prepayment charges or additional charges in the event of pre-closure.

viii. Hence LIC Housing Finance Limited is susceptible to strain arising out of pre-closure of loans in a volatile interest rate scenario like NHB. Prepayment charges are to be paid not only to NHB but to other financial institutions/banks also wherever applicable. Hence on the whole LIC Housing Finance Ltd. has to bear financial strain whenever loans are pre-closed, whatever be the sources and the nature of its borrowing. In a volatile interest rate scenario, the effect of such a strain will be severe.

ix. The observation that NHB's rate of interest is more or less stable do not seem to be correct as is evident from the various rate of interests charges by the them during the period from 1997 to 2009 ranging from 6.8% to 12.8%.

x. The decision LIC Housing Finance Ltd . to levy prepayment charges was done to mitigate the financial strain independently and before banks (IBA decision) and hence it is not of the nature of cartelization. It was a business requirement to safeguard the viability of the company. In respect of the international practices, the DG report pointed out the practice followed by USA and Taiwan. In view of the recent economic crisis faced by USA, it is not an example to follow. The economy of Taiwan, compared to Indian economy, is too small to be compared. Therefore, the reference of these two countries with respect to international practice may not be appropriate.

xi. it may be noted that the provision of prepayment charges by LIC Housing Finance Limited is not to restrict the competition, but to cover up the losses arising out of prepayment of the loans and for better management of the assets - liability gap. It is also not, as is evident from the industry history, to prevent new entrants of their growth, but purely on account of a business requirement to keep the company surviving, that too with the prior knowledge and consent of the customers.

13.5 Opposite party No. 5, ALLAHABAD BANK: The Allahabad Bank in its reply submitted that

i. Section 62 of the Competition Act envisages that provisions of the Act shall be in addition, and not in derogation of provisions of law for the time being in force which means that any contractual obligation between the parties which is not hit by the provisions of contract act shall be legally valid unless the same is so unreasonable which is against the public policy.

ii. Section 73 and 74 of the Contract Act envisages that if there is a breach of contract in that event any loss suffered by the party because of such breach, the party is liable to penalty, damage as envisaged in the contract or otherwise. A particular loan having granted on particular terms as to be payment but the borrower decides to terminate such contract , the party who suffers loss caused by such breach is entitled to recover the loss from the party who is terminating the contract the distinction made by Ld. DG in its investigation report regarding charging of prepayment charges by NHB and lending bank is without any basis.

iii. if the explanation of NHB is accepted as being business decision and that it virtually was becoming cash manager for its refinance plan then the same principle and explanation is equally applicable to the retail finance by banks. The Ld. DG in its investigation report has failed to appreciate that prepayment penalty being charged by bank is very nominal and is not so high as to discourage borrowers from shifting to any other institutions who is offering lower rate of interest.

iv. The practice of charging prepayment penalty does not have predictable and pernicious anti-competitive effect and ought not to be invalidated under 'per se rule' viz Section 3(3) of Competition Act, 2002. Under Section 3(3) law permits the Commission to presume violation without further enquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market falls foul of any of those parameters.

v. Therefore, evidence gathered and documents collected during the investigation shall be evaluated from the perspective of presence or otherwise of the parameters laid down Clauses (a) to (d) of Section 3(3) in relation to relevant market. Neither the Director General nor the Deputy Director General had gathered any evidence or data in this regard.

vi. Further there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002. According to CRISIL research report of March 2009, the Home Loan Market has registered a growth of 43% CAGR from 2000-01 to 2004-05, that is during and after the period of IBA circular.

vii. It is submitted the growth is mainly attributable to the entry of Scheduled Commercial banks in to the market and IBA circular and the practice of charging prepayment penalty has not in any way limited or controlled the availability of home loan products .

viii. Entry barriers are virtually absent for HFCs. NHB, the regulatory authority has been receiving applications from new HFCs. It had granted licenses for 3 HFCs during the year 2008. Applications of 3 more HFCs are pending with NHB as of date. If practice of charging prepayment penalty has any correlation to entry into market, then there would not be new applications for registrations before NHB. Similarly it is an observed fact that banking industry has seen entry of new private sector banks in considerable numbers in the last decade. There is no evidence to show that practice of charging prepayment penalty has in any way deterred the new entrants into the market and foreclosed competition. The practice of charging prepayment penalty has no correlation at all to entry of new entrants and competition in the home loan market much less a strong correlation to hand down a finding that the practice has appreciable adverse effect on competition per se.

ix. In order to support a finding to the effect that prepayment penalties influence market entry decisions of new entrants and forecloses competition, evidence should clearly show that prepayment penalty creates a demand side constraint forcing the new entrants to defer or decide against their entry into the market. Observed facts in the home loan market are otherwise. CRISIL report demonstrates that prepayment decisions are a function of movement of rates of interest and raising income level called cyclical prepayments and structural prepayments respectively. Prepayment decisions are not influenced by prepayment penalties. It is demonstrated that cyclical repayments were increasing till 2006-07 due to falling interest rates and were negative during the year 2006-07 due to increase in the interest rates. Structural prepayments had been increasing till 2007-08, but it had slowed down during 2008-09 due to global melt down and decreasing income levels. It is expected to show an increasing trend as income levels improve.

x. Therefore the findings that prepayment penalties create a demand side constraint are not correct and are based on considerations other than considerations of relevant market. The finding of the DG that the practice of charging prepayment penalty does not result in any benefit to consumers and thus factor enumerated in Section 19(3)(d) is present in the practice is not tenable and is based on mere conjectures and surmises and not based on facts and conditions of the relevant market. In the Indian market, prepayment penalties are finite and not infinite or ballooning as in other markets world over. It can be seen from page 14 of the Deputy Director General report that the rates are heterogeneous and nominal ranging between 1% to 2% among the investigated banks and financial institutions. One of them, namely Axis Bank does not impose any prepayment penalty. Further, prepayment penalties are imposed by the banks and financial institutions only on cyclical repayments and not structural repayments.

xi. RBI while replying vide its letter dated 11.12.2009 to Deputy Director General has categorically acknowledged that prepayment adversely impacts asset liability management. This aspect was completely ignored by the DG. DG misdirected himself in restricting his investigation to individual consumer interest and failed to considerer the totality of economic factor and interest of all classes of consumer required to be consider under Competition Act, 2002. The findings in the DG report that the overwhelming International Trend has been towards a situation where there is no exit loan on the borrowers in home loan market is not correct and the findings are based on irrelevant material and fallacious reasoning.

13.6 Opposite party No. 6, Canara Bank: The opposite party No. 6 contended in its reply that

i. DG in its investigation report relied upon Financial Regulatory Reforms-A New Foundation. The said report was prepared in the context of severe financial crises like unemployment, falling business, falling home prices and declining savings faced by United States. As such report prepared in the context of US cannot be relied upon for arriving at any conclusion in the Indian context.

ii. In US home loan market is regulated by both Federal Legislation as well as by legislation of respective States. In Indian context banks and HFCs are regulated by the law of Parliament. In US the law combines both Competition regulation and consumer protection regulations whereas India has an overreaching Consumer Protection Act which, after amendment in 2002, included both Consumer laws and unfair and restrictive trade practices in it's ambit. The investigating officer in his report after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' and having found that the practice has reasonable economic justification has given a finding that practice is not violative of Section 3(1) of the Act. He has also rejected the allegation of market dominance and abuse thereof by the banks and financial institutions and found that banks and financial institutions and IBA have not violated Sections 4(1), (2)(a)(b) of the Act. Therefore, investigating officers having given a finding that practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant positions in the market to determine prices and control services, ought not have come to a contrary and inconsistent conclusions on the basis of same evidence that banks and financial institutions have violated the Section 3(3) of Competition Act, 2002.

iii. The investigation officer in his report relies heavily on language of internal surplus of banks and financial institutions and IBA circular dtd. 10-09-2003 and contends that the stated intent is discipline the customers and increase the income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti competitive under Section 3(3). It is settled law that language in form of agreement cannot be the criterion but the economic consequences are the criterion in any anti competition investigation. DG report concludes that the practice of charging prepayment penalty is not anti competitive under Section 3(1) and the material considered does not disclose market dominance and abuse thereof under Section 4 of the Act. The practice which is not anti competitive by application of rule of reason cannot by any stretch of imagination be inherently anti competitive calling for application of 'per se rule' as concluded by the investigating officer.

iv. Under Section 3(3), law permits the commission the presume the violation without further inquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to the relevant market falls foul of any of those parameters. No evidence or data in this regard had been gathered by the DG. Further, there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provisions of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002.

v. Entry barriers are virtually absent for HFCs. NHB, the regulatory authority, has been receiving applications from new HFCs and it has granted licenses for three HFCs during the year 2008. Applications of 5 more HFCs are pending with NHB. If the practice of charging prepayment penalty has any correlation to entry into market, there would not be new applications for registrations before NHB. Similarly, banking industry has seen entry of new private sector banks in considerable numbers in last decade. There is no evidence to show that practice of charging prepayment penalty has in anyway deterred the new entrant into the new market and foreclosed the competitions.

vi. RBI while giving reply by its letter dtd. 11.12.2009 to the Deputy Director General, CCI has categorically acknowledged that prepayment adversely impacts assets liability management. This aspect was completely ignored by the investigating officer. It is settled law the rate would be called usurious only when the rate is unconscionable and extortionate. All banks and Financial Institutions charge a nominal rate of 1% to 2% for prepayment. The rates are not usurious.

vii. In the investigation report, the investigator has quoted that the judgment rendered by National Commission in the matter of SBI v. Usha Vaid and Anr. The said judgment was not rendered in the context of Section 3(3)(a), Section 3(3)(b) and Section 19(3) of Competition Act. As such the investigator should not have relied upon the said judgment in arriving at such a conclusion.

13.7 Opposite party No. 7,Corporation Bank: The Opposite party No. 7,Corporation Bank in its reply contended that

i. Investigation report of DG has not taken into consideration provisions of Section 73 and 74 of the Contract Act which envisages that if there is a breach of contract in that event any loss suffered by party because of such breach, the party is liable to pay penalty/damages as envisage in the contract or otherwise. The main rationale behind charging prepayment penalty is not discourage borrower from shifting its loan to other lenders but to mitigate loss caused by such prepayment and mitigate ALM position.

ii. The DG has based his conclusion merely on recommendation of financial regulatory reforms in USA and Taiwan. However, it has not been considered whether these recommendations were followed or not. Basing conclusions on recommendations without the same being adopted is not sustainable.

iii. The distinction made by the DG in the investigation report regarding prepayment penalty by NHB and lending bank without any basis. If the explanation of NHB is accepted as being the business decision then the same principle and explanation is equally applicable to the retail finance by banks.

iv. The DG in his investigation report has failed to appreciate that prepayment penalty being charged by bank is very nominal and is not so high as to discourage borrowers from shifting to any other institution who is offering lower rate of interest.

v. The DG having observed that the practice of charging prepayment penalty is not violative of Section 3(1), 3(2) and Section 4(1), 4(2)(a)(i) of the Competition Act, 2005, the conclusion that the practice is violative of Section 3(3) is not correct. The practice of charging prepayment penalty does not have predictable and pernicious anti competitive effect and ought not be invalidated under 'per se rule' viz Section 3(3) of the Act. In order to presume that any practice has predictable and pernicious anti-competitive effect and violates Section 3(3) of the Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly pricing in the relevant product market. There is no evidence in that regard. It is an observed fact that there is intense competition in the relevant product market, namely home loan market, as there are large numbers of service providers (sellers to use economics expression), namely Housing Finance Companies (HFCs) (43), Public Sector Banks(27), Urban Cooperative Banks (53) that are operating the market. DG investigation report while concluding that the practice of charging prepayment penalty has appreciable adverse effect on competition failed to have due regard to the provisions of Section 19(3) of the Act. Any practice before being declared as per se anti-competitive due to AAEC under Section 3, factors enumerated under Section 19 of the Competition Act shall be considered. The practice of charging prepayment penalty to be anti-competitive per se , shall ex-facie disclose presence or absence, as the case may be, of any or all factors mentioned in Section 19(3). DG in his report did not have due regard to any of said factors in relation to relevant market and has straight away declare without any hindrance that the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a),(c), (d). Entry barrier are virtually absent for HFCs.

vi. NHB granted licenses to 3 HFCs in year 2008 and applications of the 3 more HFCs are pending with the NHB. If practice of charging prepayment penalty has any correlation to entry into market, then there would not be new application for registration before NHB. The practice of prepayment penalty is highly unlikely to operate as demand side constrains creating entry barriers to new entrants.

vii. The finding of the DG report that the practice of charging prepayment penalty does not result in any benefit to consumers and thus factors enumerated in Section 19(3)(d) is present in the practice is not tenable and is based on mere conjectures and surmises and not based on facts and conditions of the relevant market.

viii. In the Indian market, prepayment penalties are finite and not infinite or ballooning as in other markets world over. The process of managing the investment risk by the banks and the financial institutions is known as Asset Liability Management (ALM) and that was the justification offered by the bank, which unfortunately was brushed aside nonchalantly by the respected DG as not enough justification. Prepayment penalty as ALM tool is eminently reasonable as long as it is meant to cover the costs associated with the investment risk

13.8 Opposite party No. 8, ICICI Bank Ltd: The opposite party No. 8 contended in its reply / objections that

i. Decision of customer/borrower to prepay the loan is a well informed and consciously well thought about decision and is based on certain cogent facts and logical conclusions. Banking means accepting deposits for the purpose of lending.

ii. Banking business has various risks like credit risk, market risk and operational risk etc. The full prepayment by a borrower generates re-investment risk for the bank. The re-investment risk cannot be passed on to the depositors.

iii. The issue of Asset Liability Mis-matches is genuine commercial realities and the fundamental issue which banks and financial institutions face and therefore necessitate banks to stipulate prepayment charges in order to adequately address such mis-matches.

iv. The applicable prepayment charges and related terms and conditions are informed clearly to the borrowers upfront as required regulatory and as a good commercial and consumer friendly practice. ICICI bank duly communicates and obtains consent of the borrowers with respect to all applicable terms and charges for the loan facility.

v. Interests rate and charges levy by the banks are well governed and monitored by RBI and the same are not subject to judicial review so far as they fall within the ambits of the rules and the regulations prescribed by the RBI. Such levying of charges cannot be deemed to be a concerted effort or a collusive activity.

vi. With respect to ICICI bank, the practice of levying such charges was in existence even prior to the referred IBA meeting and therefore ICICI bank cannot be deemed to be part of any concerted effort. RBI has not held the activity prohibitory of law but simply required the Page 48of 170 transparency so that the borrower can make reasoned decision at the time of availing a facility.

vii. Further, it is contractual arrangement between a lender and debtor, based on law of contract, under which borrower avails a loan facility under certain terms and conditions.

viii. Prepayment charges are just one of such terms. There exists concepts such as 'Early Redemption Charges (ERC)' and 'Early Settlement' in the banking practice prevalent in United Kingdom. Since 31.10.2004 most residential mortgages have been regulated by Financial Services Authority (FSA) which requires a section in the key financial information given to the customer and also mortgage offer itself describing whether and when any ERC may be payable. This clearly evident the practice of levying prepayment charges being prevalent in other jurisdiction as well. Further, since the practice adopted in EU is not very clear we should not deduce that the levy of prepayment charges is held violative of law.

ix. In the case of State Bank of India v. Dr. (Mrs.) Ushas Vaid and Ors., the borrower who had taken a loan from Standard Chartered Bank, got the loan transferred to the Appellant bank, State Bank of India as the Appellant bank issued an advertisement to the effect that they were offering a low rate of interest to housing loan customers with no prepayment charges. However the consumer realizing that ICICI Bank was charging a lesser rate of interest, approached the Appellant bank for transfer of the loan from the Appellant bank to the ICICI Bank for the obvious reasons that the rate of interest was much lower in the ICICI Bank. In spite of their advertisement, the Appellant bank charged Rs. 42,300/-as prepayment charges. The Commission held that the sum could not have been claimed by the Appellant bank as it was not prepayment but taking over. Such judgment was passed by State Commission Dispute Redressal Forum and was thus upheld by National Commission Dispute Redressal Forum and Supreme Court. This case did not determine whether levying of prepayment charges was justified or not. Further, the Supreme Court mentioned in its judgment that the question of law is still open and is left to be decided in an appropriate case.

x. ICICI Home Finance Company had started levying prepayment fees with effect from June 5, 2001. Since incorporation of ICICI Bank Limited, the practice of levy of prepayment charges has been continued as had been followed by ICICI Home Finance Company. Accordingly, it is humbly submitted that prepayment charges were being levied by ICICI Group even prior to the IBA meeting ("Meeting"), at which the advent of this concept has been stated in the Report. To elucidate, Section 3(3) of the Act, prohibits "agreement" between enterprises, "practices" carried on "decision" taken by an association of enterprises.

xi. It is submitted that ICICI Bank has not entered into an agreement, taken a decision or begun any new practice post the Meeting and therefore cannot be deemed to be part of the cartel as mentioned in the Report. Considering the fact that levying of prepayment charges was already prevalent in market and industry appreciated the requirement of the same, the discussions at the IBA meetings can be deemed to be 'parallel behaviour', as explained in paragraph 4.3-3 of Raghvan's report on Competition Law.

xii. This concept has also been upheld in the European Court of Justice. In the light of all the arguments raised herein above, The object of the Meeting was not anti-competitive. The decisions taken at the Meeting do not cause an Appreciable Adverse Effect on Competition in India and therefore will not fall within the ambit of Section 19(3) of the Act. CRISIL research report of March 2009, mentioned that the home loan market had registered a growth of 43% from 2000-01 to 2004-05, that is during the period after the issue of the IBA circular. It is submitted that this growth is mainly attributable to the entry of Scheduled Commercial Banks in to the market and IBA circular and the practice of charging prepayment penalty has not in any way limited or controlled the availability of home loan products. Also, such levy of charges has not imposed any entry barriers in the market.

xiii. National Housing Bank (NHB), the regulatory authority has been receiving applications of 3 more HFCs are pending with NHB as of date. If practice of charging prepayment penalty has any correlation entry into market, then there would not be new applications for registrations before NHB. As mentioned earlier in the reply, such a levy was primarily to correct the asset liability mismatch in the books of lending institutions.

13.9 Opposite party No. 9, Indian Bank: The opposite party No. 9 in its reply contended that

i. Deputy Director General in his report after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' and having found that the practice has reasonable economic justification, has given a finding that the practice is not violative of Section 3(1) of the Competition. He has also rejected the allegations of market dominance and abuse thereof by the Banks and Financial Institutions and found that Banks and Financial Institutions and IBA have not violated Section 4(1), 4(2)(a)(i) of the Act. Therefore, it is submitted that Deputy Director General having given a finding that the practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant position in the market to determine prices or control services, ought not have come to a contrary and inconsistent conclusion that Banks and Financial Institutions have violated Section 3(3) of Competition Act, 2002.

ii. It has been contended that Director General relies heavily on the language of the internal circulars of Banks and Financial Institutions and IBA Circular dated 10.09.2003 and contends that the purport/intent is to discipline the customer and to increase income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti competitive under Section 3(3) of the Act. It is settled law that the language and form of agreements cannot be the criterion but the economic consequences are the criterion in any anti competition investigation. Under Section 3(3) of Competition Act, Law permits the Commission to presume violation without further enquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Sec 3(3) in relation to relevant market falls foul of any of those parameters. There is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002.

iii. It has been contended that practice of charging prepayment penalty does not have predictable and pernicious anti-competitive effect and ought not to be invalidated under 'per se rule' viz. Section 3(3) of Competition Act, 2002. The recommendations are mere sweeping generalizations and not conclusions based on evidence and material. It is fact that there is intense healthy but stiff competition in the relevant product market, namely home loan market, as there are large numbers of players. The borrower has multiple choices with regard to products and credit Purveyors.

iv. Further, the market participants are highly regulated by the Government RBI and NHB whose mandate is protection of public interest. None of the service providers is dominant the market. It is an observed fact that

(i) there is no interdependence as to price

(ii) there is no market sharing

(iii) there is no price leadership

(iv) there are no entry barriers.

If these elements had been present, home loan market would not have witnessed steady decline of interest rates and consequent exponential growth of market after scheduled commercial banks were allowed to grant home loans by RBI. As on date, the interest rates are very competitive among the market participants is an acknowledged fact. Any practice before being declared as per se anti-competitive due to AAEC under Section 3 factors enumerated under Section 19 of the Competition Act has to be considered.

v. DG in his report did not have due regard to any of the above factors in relation to relevant market. He has straight away declared without any evidence the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a), (c), (d).

vi. There is no evidence to show that practice of charging prepayment penalty has in anyway deterred the new entrants into the market and foreclose competition.

vii. Therefore, findings of DG are devoid of substance. Prepayment decisions of the customer are an action based on movements of rate of interest and raising income level. The prepayments could be cyclic prepayments and structural prepayments. Prepayments decisions are not influence by prepayment penalties. It is elementary that banking means accepting deposits for the purpose of lending. Banks secures funds by way of deposits which is a liability to the bank for specified period at a fixed rate. Pricing of loan is linked to cost of funds banking business has various risks, credit risk, market risk and operation risk etc. Banks are required to manage re-investment risk and it is not feasible to factor the same in the rate of interest alone. Considering the competition in the market to acquire the customer. This process of managing re-investments risks by the banks and financial institutions are known as Asset Liability Management (ALM) and that was the justification offered by the bank, which was brushed aside nonchalantly by the respected DG as not enough justification.

13.10 Opposite party No. 10, Indian Overseas Bank (IOB): The Opposite party No. 10 contended that

i. Deputy Director General in his report on the practices of charging of prepayment penalty by banks and financial institutions after collection information through various circulars of banks and financial institutions and communication of IBA dated 10.09.2003 to its members has opined that the information, the documents and findings gathered by him do not support the allegations of informer that the banks and financial institutions have violated Section 3(1), 3(2) and Section 4(1), (2)(a) (i) of the Act. Therefore, there should be no other conclusions with regard to the challenge given by the informer, other than what the Deputy Director General has held in his comprehensive report. Section 3(1) read with Section 3(2) is in pari materia with Section 1 of Sherman Act, 1890 of USA, which is based on 'rule of reasonableness' initiated by the Courts in USA and followed by Indian Courts under MRTPC Act.

ii. Deputy Director General in his report after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' and having found that the practice has reasonable economic justification has given a finding that the practice is not violative of Section 3(1) of the Competition Act. He has also rejected the allegations of market dominance and abuse thereof by the banks and financial institutions and found that the banks and financial institutions and IBA have not violated the Section 4(1), 4(2)(a)(i) of the Act. Therefore, the Deputy Director General having given a finding that the practice of charging prepayment penalty is economically reasonable and the persons are investigated are not in dominant position in the market to determine prices or control services ought not have come to a contrary and inconsistent conclusion on the basis of same evidence that banks and financial institution have violated Section 3(3) of the Competition Act.

iii. Director General in his report relies heavily on the language of the internal circulars of banks and financial institutions and IBA circular dated 10.09.2003 and contends that the stated intent is to discipline the customer and to increase the income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti-competitive under Section 3(3) of the Competition Act. It is settled law that the language and the form of the agreement cannot be the criterion but the economic consequences are the criterion in any anti-competition investigation. Therefore, a practice which is not anti-competitive by application of 'rule of reason' cannot by any stretch of imagination be inherently anti-competitive calling for application of 'per se rule' as is concluded by DG in his report.

iv. For the purpose of invoking Section 3(3) of the Act the practice of charging prepayment penalty should ex-facie result in or shall have the probability of resulting in any or any economic consequences enumerated under Section 3(3) (a) to (d). There is no discussion in the DG report whether the practice of charging prepayment penalty ex-facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3). Thus, the findings and the recommendations are mere sweeping generalization and not conclusions based on evidence and material. In order to presume any practice as violative of Section 3(3) of the Competition Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly prices in the relevant market. There is no evidence in this regard. It is an observed fact that there is intense competition in relevant product market, as there are large numbers of service providers.

v. The HFCs are not members of IBA. It is settled under Competition Law that presence of highly regulated entities is antithetical to existing of price monopolies. According to CRISIL's research report of March, 2009, the home loan market has registered a growth of 43% from 2000-01 to 2004-05, that is during and after the IBA circular. Any practice before being declared as per se anti-competitive due to AAEC under Section 3, factors enumerated under Section 19 of the Competition Act shall be considered.

vi. The practice of charging prepayment penalty to be anti-competitive per se, shall ex-facie disclose presence of absence, as the case may be, of any or all factors given in Section 19(3). DG report did not have due regard to any of the factor enumerated in Section 19(3) in relation to relevant market. It has straight away declared without any evidence the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a), (c), (d). The evidences does not support the findings that prepayment penalties influence decisions of new entrants and thus having regard to the factors under Section 19(3)(a),(c),(d), it has AAEC.

vii. It is elementary the banking means accepting deposits for the purpose of lending. Banking business has various risks like credit risk, market risk and operation risk etc. Prepayment by a borrower generates re-investment risk for the bank. Banks are required to manage this re-investment risk and it is not feasible to factor the same in the rate of interest alone considering the competition in the market to acquire a customer. The re-investment risk cannot be passed on to the depositors.

viii. RBI in its letter dated 11.12.2009 to the Deputy DG has categorically acknowledge prepayment adversely impacts Asset Liability Management (ALM). This aspect was completely ignored by the DG.

ix. DG has misdirected himself in restricted his investigation to individual consumer interest and failed to consider to totality of economic factor and interest of all classes of consumer required to be considered under Competition Act, 2002.

x. In US, home loan market is regulated both by Federal Legislation as well as legislation of respective States. In analogy to this in Indian context is that the banks and HFCs are regulated by the Law of Parliament; namely Banking Regulation Act and National Housing Bank Act and money lenders are regulated by Money Lender's Act of the respective State.

xi. In US the law combines both regulation and consumer protection, whereas India has a overarching Consumer Protection Act. After the amendment in 2002, the scope of Consumer Protection Act has been widened to include both consumer protection law and Unfair trade Practices. The findings of the DG that prepayment penalty is banned in US is based on misreading of law and regulation in the USA.

xii. Further, reference of newsletter of Fair Trade Commission (FTC), Taiwan to buttress his argument and finding that the prepayment penalty impedes allocation of capital and interest rate competition in the market is quoted out of the context and is not relevant to the investigation whether the prepayment penalty is anti-competitive. FTC, Taiwan's decision is with reference to Far Eastern International Bank (FEIB) that the dominant marketing, Taiwan. The investigation of DG and the findings are to the effect that the practice of charging prepayment penalty are unjustified costs on consumers (Report uses word 'usurious' in paragraph 10.3) and therefore anti-competitive. If prepayment penalty should be prohibited on the ground of 'usury', then only Consumer Courts will have the jurisdiction to do it as cost considerations purely from the perspective of individual consumer is outside the realm of Competition Law in India.

xiii. The judgment of consumer courts relied on by the DG in support of his findings was under Consumer Protection Act, 1986. Even in those judgments there is no whisper as to whether the practice of charging prepayment penalty is a restrictive trade practice imposing unjustified costs on the individual consumers. The judgment was based facts, which disclosed that prepayment charges were levied in that case even though loan was not disbursed and merely because the complainant has chosen to avail the loan from other bank instead of Respondent bank. The consumer courts rightly held that what was charged was not prepayment penalty but penalty for not taking the loan though the Bank was ready to give the loan. The case is not at all representative of instances, where banks charge prepayment penalty for prepayment after loan was disbursed and utilized by the borrowers. The order of Supreme Court in the case is not an authority for the proposition that Banks cannot charge prepayment penalty. The reliance on the judgment is misplaced.

13.11 Opposite party No. 11,Oriental Bank of Commerce: The opposite party No. 11 in its reply contended that

i. Deputy Director General in his report on the practice of charging of pre-payment penalty by banks and financial institutions has collected all the internal circular of Banks and a communication of IBA dated 10.09.2003 to its members and relied on their contents for the purpose of his conclusion. He has held that the information, documents and evidence gathered by him do not support the allegation of informer that Banks and Financial institutions have violated Sections 3(1), 3(2) and Section 4(1), 4(2)(a)(i) of the Act. Having held that the practice of charging prepayment penalty is violative of Sections 3(1), 3(2) and 4(1), 4(2)(a)(i) of the Act, the conclusion that the practice is violative of Section 3(3) is not correct. Section 3(1) read with Section 3(2) is in pari materia with Section 1 of Sherman Act 1890 of United States of America, which is based on 'rule of reasonableness' enunciated by the courts in United States and followed by Indian Courts under MRTPC, which now stands repealed and replaced by Competition Act.

ii. Deputy Director General in his report after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' and having found that the practice has reasonable economic justification has given a finding that the practice is not violative of Section 3(1) of the Competition. He has rejected the allegations of market dominance and abuse thereof by the Banks and Financial Institutions and found that Banks and Financial Institutions and IBA have not violated Section 4(1), 4(2)(a)(i) of the Act. Therefore, it is submitted that the Deputy Director General having given a finding that the practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant position in the market to determine prices or control services, ought not to have come to a contrary and inconsistent conclusion, on the basis of same evidence that Banks and Financial Institutions have violated Section 3(3) of the Act.

iii. DG in his report relies heavily on the language internal circulars of banks and financial institutions and IBA circular dated 10.09.2003 and contends that the stated intent is to discipline the customers and to increase the income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti-competitive under Section 3(3) of the Competition Act.

iv. It is settled law that language and the form of agreements cannot be the criterion but the economic consequences are criterion in any competition investigation. Thus, therefore, a practice which is not anti-competitive by application of 'rule of reason' cannot, by any stretch of imagination, be inherently anti-competitive calling for application of per se rule as is concluded by DG report.

v. It is settled law that for the purpose of invoking Section 3(3) of the Competition Act, the practice of charging prepayment penalty should ex-facie result in or shall have the probability of resulting in any or all economic consequences enumerated under Section 3(3)(a) to (d). There is no discussion in DG report whether the practice of charging prepayment penalty ex-facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3). Thus, the findings and recommendations are mere sweeping generalizations and not conclusions based on evidence and material. There is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although vi. it is concluded in the report of DG that the practice is violative of Section 3(3)(b) of the Competition Act. In order to presume any practice as violative of Section 3(3) of the Competition Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly prices in the relevant market. There is no evidence in this regard.

vii. It is an observed fact that there is intense competition in relevant product market, as there are large number of service providers. Further, the market participants are regulated by the Government, RBI, NHB, whose mandate is protection of public interest. It is settled in Competition Law that presence of highly regulated entities is antithetical to the existence price monopolies. HFCs are not members of IBA. According to CRISIL research report of March 2009, the home loan market has registered a growth of 43% CAGR from 2000-01 to 2004-05, that is during and after the period of IBA circular. The said growth is mainly attributable to the entry of Scheduled Commercial Banks in to the market and IBA circular and the practice of charging prepayment penalty has not in any way limited or controlled the availability of home loan products.

viii. Any practice before being declared as per se anti-competitive due to AAEC under Section 3, factors enumerated under Section 19 of the Competition Act shall be considered. The practice of charging prepayment penalty to be anti-competitive per se, shall ex-facie disclose presence of absence, as the case may be, of any or all factors given in Section 19(3). DG report did not have due regard to any of the factor enumerated in Section 19(3) in relation to relevant market. It has straight away declared without any evidence that the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a), (c), (d).

ix. The evidences does not support the findings that prepayment penalties influence decisions of new entrants and thus having regard to the factors under Section 19(3)(a),(c),(d), it has AAEC. Further, there is no evidence to show that the practice of charging prepayment penalty has in anyway deterred the new entrants into the market and foreclosed the competition. The levy of prepayment charges by NHB, a 100% subsidiary or RBI, which is a refinancing bank has been upheld by the DG as according to him "this imposition of prepayment levy by NHB was a business decision and cannot be said to be anti competitive. It is absolutely misconceived to hold the said practice on part of banks and financial institutions (FIs) as anti-competitive and holding at the same time the similar levy by NHB as business decision. CRISIL report demonstrates that prepayment decisions are a function of movement of rates of interest and raising income level called cyclical prepayments and structural prepayments respectively. Prepayment decisions are not influenced by prepayment penalties. It is demonstrated that cyclical prepayments were increasing till 2006-07 due to falling interest rates and were negative during the year 2006-07 due to increase in the interest rates. Structural prepayments had been increasing till 2007-08, but it had slowed down during 2008-09 due to global melt down and decreasing income levels. Therefore, the findings that prepayment penalties creates a demand side constraints is not correct and is based on considerations other than considerations of relevant market. At present only cyclical prepayments attract prepayment penalty. It would be obvious that cyclical prepayment would happen only when marginal cost of refinance is insignificant and there is comparative cost advantage in taking new loan. It is demonstrated in the CRISIL report that cyclical repayments had shown increasing rend during the years 2000-01 to 2003-04 due to falling interest rates. It turned negative during 2006-07 due to sharp rise in interest rates and it has again increased during the year 2007-08 and 2008-09. It is expected to show increasing trend from 2009-10 onwards. Prepayment penalties were present during all these years, as has been stated in the DG report.

x. It is elementary the banking means accepting deposits for the purpose of lending banking business has various risk like credit risk, market risk and operation risk etc. Prepayment by a borrower generates re-investment risk for the bank. Banks are required to manage this re-investment risk and it is not feasible to factor the same in the rate of interest alone considering the competition in the market to acquire a customer. The re-investment risk cannot be passed on to the depositors. The process of managing the re-investment risk by the banks and F Is are known as Asset Liability Management (ALM) and that was the justification offered by the bank, which unfortunately was brushed aside nonchalantly by the DG as not enough justification.

xi. It has been contended that prepayment penalty ALM tools is eminently reasonable as long as it is meant to cover the costs associated with re-investment risk. RBI while giving reply by its letter dated 11.12.2009 to Deputy Director General has categorically acknowledged that prepayment adversely impacts asset liability management. This aspect was completely ignored by the DG. DG misdirected himself in restricting his investigation to individual consumer interest and failed to considerer the totality of economic factor and interest of all classes of consumer required to be consider under Competition Act, 2002.

xii. In US, home loan market is regulated both by Federal Legislation as well as respective States. In analogy to this in Indian context is that the banks and HFCs are regulated by the Law of Parliament; namely Banking Regulation Act and National Housing Bank Act and money lenders are regulated by Money Lender's Act of the respective State. In US the law combines both competition regulation and consumer protection, whereas India has a overarching Consumer Protection Act. After the amendment in 2002, the scope of Consumer Protection Act has been widened to include both Restrictive and Unfair Practices.

xiii. The findings of the DG that prepayment penalty is banned in US is based on misreading of law and regulation in the USA. Further, reference of newsletter of Fair Trade Commission (FTC), Taiwan to buttress his argument and finding that the prepayment penalty impedes allocation of capital and interest rate competition in the market is quoted out of the context and is not relevant to the investigation whether the prepayment penalty is anti-competitive. FTC, Taiwan's decision is with reference to Far Eastern International Bank (FEIB) that the dominant marketing, Taiwan.

xiv. The prepayment penalty is a cost to the consumer and is included in the price of services offered by the Banks and Financial Institutions. Section 3 of Competition Commission Act, 2002 declares void, practices in the nature of predatory or monopoly or oligopoly pricing in the market. The Act does not concern itself with the restrictive or unfair price terms. Jurisdiction with respect to restrictive or unfair price terms is with Consumer forums under Consumer Protection Act, 1986.

13.12 Opposite Party No. 12, Punjab & Sindh Bank: The opposite party No. 12 contended in its reply/objections that

i. In the report it is held that charging prepayment charges is anti-competitive under Section 3(3) and Section 19(3) of the Competition Act. It is settled law that for the purpose of invoking Section 3(3) of the Act, the practice of charging prepayment penalty should ex-facie result in or shall have the probability of resulting in any or all the economic consequences enumerated under Section 3(3)(a) to (d). There is no discussion in DG report whether the practice of charging prepayment penalty ex-facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3). Thus, the findings and recommendations are mere sweeping generalizations and not conclusions based on evidence and material.

ii. The DG in his report on practice of charging prepayment penalty by banks and financial institutions has collected all the internal circulars of banks as well as communications of IBA dated 10.09.2003 to its members and relied on their contents for the purpose of his conclusion. The IBA is an Industry Association of Scheduled Commercial Banks formed way back in 1946 with the main objective of acting as a coordinator between Government of India, RBI and commercial Banks. Further IBA acts as a clearing house for dissemination and exchange of statistical data, information, views and opinions on the systems, procedures and practices, and organization and methods of banks and on the structure, working and operations of the banking system and to explore, plan, co-ordinate and organize detailed surveys on banking, business, resources, personnel and management development programmes of banks and the banking industry. Banks do not decide fixing of their prices/interest rates or other charges under the umbrella of IBA. As such there is no cartel, hence the provision of Section 3(3) are not applicable to the bank.

iii. The Deputy Director General in his report has held that the information, documents and evidence gathered by him do not support the allegation of the informer that banks and financial institutions have violated Sections 3(1), 3(2) and Sections 4(1), 4(2)(a)(i) of the Act.

iv. The Deputy Director General has given finding in his report the practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant position in the market to determine prices or control services, therefore, the other conclusion in the same report having held that the banks have violated Section 3(3) of the Competition Act is contrary and inconsistent conclusion to the earlier conclusion. It is submitted that that DG in his report relies heavily on the language of the internal circulars of Banks and Financial Institutions and IBA circular dated 10.09.2003 and contends that the stated intent is to discipline the customer and to increase income. DG in its report concluded that the language of the circular, being monopolistic, the practice of charging prepayment penalty is per se anti-competitive under Section 3(3) of the Act. It is settled law that the language and form of agreements cannot be the criterion but the economic consequences are the criterion in any anti-competition investigation. The argument in the DG report is not to the effect that the practice of charging prepayment penalty is inherently anti-competitive and no other conclusion is possible. Practice of charging prepayment penalty does not have predictable and pernicious anti-competitive effect and ought not to be invalidated under 'per se rule' viz. Section 3(3) of Competition Act. Under Section 3(3) law permits the Commission to presume violation without further inquiry only and only if any trade practice tested on the parameter laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market falls foul of any of those parameters. Therefore, evidence gathered and documents collected during the investigation shall be evaluated from the prospective of presence or otherwise of the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market.

v. Neither the DG nor the Deputy Director General had gathered any evidence or data in this regard. Further, there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that practice is violative of Section 3(3)(b) of Competition Act. In order to presume that any practice has predictable and pernicious anti-competitive effect and violates Section 3(3) of the Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly pricing in the relevant product market. There is no evidence in that regard. It is an observed fact that there is intense competition in the relevant product market, namely home loan market, as there are large numbers of service providers (sellers to use economics expression), namely Housing Finance Companies (HFCs) (43), Public Sector Banks(27), Urban Cooperative Banks (53) that are operating the market. Further, the market participants are highly regulated by the Government, RBI, NHB whose mandate is protection of public interest. It is settled under Competition Law that presence of highly regulated entities is antithetical to existence of price monopolies. Punjab & Sind bank has negligible share in the market for housing loan segment, which is grossly inadequate to exercise monopolistic control of market.

vi. Director General in his report while concluding that the practice of charging prepayment penalty has AAEC, failed to have due regard to the provisions of Section 19(3) of the Act in relation to relevant market. He has straight away declared without any evidence that the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a), (c), (d). Evidence does not support the findings that prepayment penalty influence decisions of new entrants and thus having regard to the factors under Section 19(3)(a), (c),(d), it has AAEC.

vii. In housing finance market entry barriers are virtually absent for the HFCs. NHB, the regulatory authority, has been receiving applications from new HFCs. Similarly, it is an observed fact that the banking industry has seen entry of new private sector banks in considerable numbers in the last decade. There is no evidence to show the practice of charging prepayment penalty has in anyway deterred the new entrants into the market and foreclosed competition. The practice of charging prepayment penalty has no correlation at all to entry of new entrants and competition in the home loan market much less a strong correlation to hand down a finding that the practice has appreciable adverse effect on competition per se. It is submitted that in order to support a finding to the effect that prepayment penalties influence market entry decisions of new entrants and forecloses competition, evidence should clearly show that prepayment penalty creates a demand side constraint forcing the new entrants to defer or decide against their entry into the market. Observed facts in the home loan market are otherwise. CRISIL report demonstrates that prepayment decisions are a function of movement of rates of interest and raising income level called cyclical prepayments and structural prepayments respectively. Prepayment decisions are not influenced by prepayment penalties. It is demonstrated that cyclical repayments were increasing till 2006-07 due to falling interest rates and were negative during the year 2006-07 due to increase in the interest rates. Structural prepayments had been increasing till 2007-08, but it had slowed down during 2008-09 due to global melt down and decreasing income levels. Therefore the findings that prepayment payment penalties create a demand side constraint are not correct and are based on considerations other than considerations of relevant market.

viii. The practice of prepayment penalty is highly unlikely to operate as demand side constraints creating entry barriers to new entrants. This is because a decision to prepay home loan depends on cyclical factors and structural factors. Almost none of the banks and financial institution in the market levy prepayment penalty in case of structural prepayment, that is to say prepayment out of one's own funds. At present only cyclic prepayments attract prepayment penalty. It is demonstrated in the CRISIL report that cyclical repayments had shown increasing trend during the years 2000-01 to 2003-04 due to falling interest rates. It turned negative during 2006-07 due to sharp raise in interest rates and it has again increased during the years 2007-08 and 2008-09. It is expected to show increasing trend from 2009-10 onwards. Prepayment penalties were present during all these years.

ix. It is elementary that banking means accepting deposits for the purpose of lending. Banking business has various risks like credit risk, market risk and operation risk etc. Prepayment by a borrower generates re-investment risk for the bank. Banks are required to manage this re-investment risk and it is not feasible to factor the same in the rate of interest alone considering the competition in the market to acquire a customer. The re-investment risk cannot be passed on to the depositors.

x. RBI while giving reply by its letter dated 11.12.2009 to the Deputy DG has categorically acknowledge prepayment adversely impacts Asset Liability Management (ALM). This aspect was completely ignored by the DG. DG has misdirected himself in restricted his investigation to individual consumer interest and failed to consider to totality of economic factor and interest of all classes of consumer required to be considered under Competition Act, 2002. The stated objective of Competition Act, 2002 as per its preamble is to prevent practices having adverse effect on competition, to promote and sustain competition in the markets, to protect the interests of the consumers. The term 'the Consumer' under the Competition refers to all classes of consumers and not individual consumers. Therefore, the Commission while investigating the practices in the market is required to holistically consider whether the practice affects all classes of consumers. If the alleged practice is not that beneficial to one class of consumers but are beneficial to another class of consumers, the Commission cannot take the side of only one class of consumers and declare the practice as illegal.

xi. The DG failed to appreciate the difference between Restrictive Trade Practice and a practice having appreciable adverse impact on competition and thus misdirected himself in assuming jurisdiction of the Commission. The investigation of DG and the findings are to the effect that the practice of charging prepayment penalty unjustified cost on consumer (word 'usurious' is used in the report) and therefore anti-competitive. It is submitted that if prepayment penalty should be prohibited on the grounds of 'usury', then only Consumer Court will have the jurisdiction to do it as cost consideration purely from the perspective of individual consumer is outside realm of Competition Law in India. The order of Hon'ble Supreme Court in the case is not an authority for the proposition that banks cannot charge prepayment penalty. The reliance on the judgment is misplaced.

13.13 Opposite party No. 13, Punjab National Bank: The opposite party No. 13 in its reply contended that

i. at the Commission has no jurisdiction in regard to inquiry into prepayment charges levied by banks and HFCs on the ground that the banks and HFCs are regulated by the RBI and the NHB respectively.

ii. Having held that the practice of charging prepayment penalty is not violative of Sections 3(1), 3(2) and Sections 4(1), 4(2)(a)(i) of the Act, the conclusion that the practice is violative of Section 3(3) is not correct.

iii. Deputy Director General in his report on the practice of charging of prepayment penalty by banks and financial institutions has collected all the internal circulars of banks and a communication of IBA dated 10.09.2003 to its members and relied on the their contents for the purpose of his conclusion. Deputy Director General having given a finding that the practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant position in the market to determine prices or control services, ought not have come to a contrary and inconsistent conclusion on the basis of same evidence that Banks and Financial Institutions have violated Section 3(3) of Competition Act, 2002.

iv. The DG in the report has unnecessary and without any basis relied heavily on the language of the internal circulars of Banks and Financial Institutions and IBA letter dated 10.09.2003 and contends that the stated intent is to discipline the customer and to increase income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti-competitive under Section 3(3) of the Act. Finding of the DG is incorrect and against the legal provisions of Competition Act.

v. There is no agreement, any arrangement or understanding or action in concert amongst various banks and HFCs. This position is also clear from the report itself that various banks have been charging prepayment penalty beginning from different time and different rates. In view of this how charging or prepayment charges can be said to be result of any agreement as contained in the Act. It is settled law that the words used in the individual circular issued by the banks, cannot be the criterion for any activity to be anti-competitive but the economic consequences are the criterion of any anti-competition investigation. It is settled law that for the purpose of invoking Section 3(3) of the Act the practice of charging prepayment penalty should ex facie result in or shall have the probability of resulting in any or all the economic consequences enumerated under Section 3(3) (a) to (d).

vi. There is no discussion in the DG report whether the practice of charging prepayment penalty ex facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3). Thus the findings and the recommendations are mere sweeping generalizations and not conclusions based on evidence and material on record.

vii. Under Section 3(3) law permits the Commission to presume violation without further enquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market falls foul of any of those parameters. Therefore, evidence gathered and documents collected during the investigation shall be evaluated from the perspective of presence or otherwise of the parameters laid down Clauses (a) to (d) of Section 3(3) in relation to relevant market. Neither the DG nor the Deputy Director General had gathered any evidence or data in this regard. Further there is no discussion in this regard. Further there is no discussion in the report as how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002.

viii. In order to presume that any practice has predictable and pernicious anti-competitive effect and violates Section 3(3) of the Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly pricing in the relevant product market. There is no evidence in that regard in the report. It is an observed fact that there is intense competition in the relevant product market. Further, the market participants are highly regulated by the Government, RBI, NHB, whose mandate is protection of public interest. It is settled under Competition Law that presence of highly regulated entities is antithetical to existence of price monopolies.

ix. According to CRISIL report of March 2009, the Home Loan Market has registered a growth of 43% CAGR from 2000-01 to 2004-05, that is during and after the period of IBA circular. It is submitted the growth is mainly attributable to the entry of Scheduled Commercial Banks in to the market and IBA circular and the practice of charging prepayment penalty has not in any way limited or controlled the availability of home loan products. The evidence does not support the findings that prepayment penalties influence decisions of new entrants and thus having regard to the factors under Section 19(3)(a), (c) (d) above, it has appreciable adverse effect on competition.

x. Even a lay observer of the housing finance market would agree that entry barriers are virtually absent for HFCs NHB, the regulatory authority has been receiving applications from new HFCs. It had granted licenses for 3 HFCs during the year 2008. Applications of 3 more HFCs are pending with NHB as of date. If practice of charging prepayment penalty has any correlation to entry into market, then there would not be new applications for registrations before NHB. Similarly it is an observed fact that Banking Industry has seen entry of new private sector banks in considerable numbers in the last decade. There is no evidence to show that practice of charging prepayment penalty has in any way deterred the new entrants into the market and foreclosed competition. The practice of charging prepayment penalty has no correlation at all to entry of new entrants and competition in the home loan market much less a strong correlation to hand down a finding that the practice has appreciable adverse effect on competition per se. CRISIL report demonstrates that prepayment decisions are a function of movement of rates of interest and raising income level called cyclical prepayments and structural prepayments respectively. Prepayment decisions are not influenced by prepayment penalties. It is demonstrated that cyclical repayments were increasing till 2006-07 due to increase in the interest rates. Structural prepayments had been increasing till 2007-08, but it had slowed down during 2008-09 due to global melt down and decreasing income levels. It is expected to show an increasing trend as the income levels improve. Therefore the findings that prepayment payments penalties create a demand side constraint are not correct and are based on considerations other than considerations of relevant market. The practice of prepayment of penalty is highly unlikely to operate as demand side constraint creating entry barriers to new entrants. This is because a decision to prepay a home depends on cyclical factors and structural factors.

xi. It has been submitted that PNB and many other Banks do not levy prepayment penalty in case of structural prepayments, that is to say prepayment out of one's own funds and the said fact is accepted by DG in his report. At present only cyclical prepayments attract prepayment penalty. It would be obvious that cyclical prepayment would happen only when marginal cost of refinance is insignificant and there is comparative cost advantage in taking new loan. The finding of DG report that the practice of charging prepayment penalty does not result in any benefit to consumers and this factor enumerated in Section 19(3)(d) is present. However, the finding is not tenable and is based on mere conjectures and surmises and not based on facts and conditions of the relevant market.

xii. In the Indian market, prepayment penalties are finite and not infinite or ballooning as in other markets world over. It can be seen from page 14 of the Deputy DG report that the rates are heterogeneous and nominal ranging between 1% to 2% among the investigated banks and financial institutions. One of them, namely Axis Bank does not impose any prepayment penalty. Further, prepayment penalties are imposed by the banks and financial institutions only on cyclical repayments and not structural repayments. In other words, prepayment penalty is applicable only when the customer chooses to refinance the home loan and not otherwise. Finding in the report that prepayment penalties are anti-consumer is baseless for another reason also. Banking means accepting deposits for the purpose of lending. Banking business has various risks like credit risk, market risk and operational risk etc. Prepayment by a borrower generates re-investment risk for the bank. Banks are required to manage this re-investment risk it is not feasible to factor the same in the rate of interest alone considering the competition in the market to acquire a customer. The process of managing re-investment risks by the banks and financial institutions is known as Asset Liability Management (ALM) and that was the justification offered by the bank, which unfortunately was brushed aside nonchalantly by the respected DG as not enough justification. Prepayment penalty as ALM tool is eminently reasonable as long as it is meant to cover the costs associated with re-investment risk. The RBI while giving reply by its letter dated 11.12.2009 to the Deputy Director General has categorically acknowledged that prepayment adversely impacts ALM. This aspect was completely ignored by the DG. The term 'the Consumer' under the Competition refers to all classes of consumers and not individual consumers. Therefore, the Commission while investigating the practices in the market is required to holistically consider whether the practice affects all classes of consumers. If the alleged practice is not that beneficial to one class of consumers but are beneficial to another class of consumers, the Commission cannot take the side of only one class of consumers and declare the practice as illegal.

xiii. In US home loan market is regulated both Federal Legislation as well as respective States. In Indian context banks and HFCs are regulated by the law of Parliament. In US the law combines both regulation and consumer protection whereas India has an overreaching Consumer Protection Act which, after amendment in 2002, included both unfair and restrictive trade practices. Further, reference of newsletter of Fair Trade Commission (FTC), Taiwan to buttress his argument and finding that the prepayment penalty impedes allocation of capital and interest rate competition in the market is quoted out of the context and is not relevant to the investigation whether the prepayment penalty is anti-competitive. FTC, Taiwan's decision is with reference to Far Eastern International Bank (FEIB) that the dominant marketing, Taiwan. The investigation of DG and the findings are to the effect that the practice of charging prepayment penalty are unjustified costs on consumers (Report uses word 'usurious' in paragraph 10.3) and therefore anti-competitive. If prepayment penalty should be prohibited on the ground of 'usury', then only Consumer Courts will have the jurisdiction to do it as cost considerations purely from the perspective of individual consumer is outside the realm of Competition Law in India. The order of Supreme Court in the case is not an authority for the proposition that Banks cannot charge prepayment penalty. The reliance on the judgment is misplaced.

13.14 Opposite party No. 14, State Bank of Hyderabad: The opposite party No. 14 in its reply contended that

i. There is no agreement entered between the Banks for charging the prepayment interest. It is left to the individual bank whether to charge or not. Even otherwise charging of prepayment interest/charges increases efficiency in the banking services and falls within the exception under Section 3.

ii. State Bank of Hyderabad (SBH) is not charging prepayment charges/interest on all retail loans and even in case of housing loans only if the loan is repaid by taking over by another bank or where amount is prepaid in excess of the EMI payments. The charging of prepayment interest is not the rule, it is only exception.

iii. The market is vast and there are at present 27 public sector banks and 25 private banks apart from 32 foreign bank branches on as on March 2009. Any person can approach any bank at his choice for availing any finance. The prospective buyer after going through the prevailing interest rates, terms of payment, period of payment, facilities and other services available, can go to the bank of his choice. The question of dominant position thus does not arise. It is submitted the SBH is charging prepayment of charges only in respect of Housing Loans that too in specified conditions. This prepayment clause is not applicable to other borrowers or other types of loans as stated above. Further the section itself recognizes (explanation to section) the discriminatory conditions or prices may be adopted to meet the competition or when its limits or restricts services development of services etc.

iv. Even otherwise it is submitted that the market share of SBH in all scheduled commercial banks (ASCB) is limited only to merely 1.50%. So by any stretch of imagination it cannot be said the bank is in a dominating position. As such the question of abuse of its dominant position does not arise.

v. The international practice appears to be in favor of charging prepayment charges. The prepayment charges are also being levied by World Bank and other institutions. International Bank for Reconstruction & Development will charge prepayment premium to cover the cost to IBRD of redeploying prepaid funds. The calculation of redeployment cost for all or any portion of FSL (Fixed Rate Single Currency Loans) that has not been converted is carried out in accordance with the guidelines framed.

vi. The World Bank also charges prepayment penalty of 2 %. No law or directions of RBI prohibits charging prepayment penalty. So the agreement entered by borrower is valid.

vii. It is borrower who enters the agreement with the bank. The party makes a proposal/offer to avail finance from the Bank on its terms. Then on processing the proposal/offer bank make a counter offer of terms of sanction including its intention to charge prepayment charge/interest. Then on examining the party may accept may reject terms of sanction. During negotiation while processing the loan the party is also informed about the terms levied for housing loans. So with the willingness and full awareness the party accepts the proposal/sanctioned terms of Ban and executes the loan document. So, this process will not violate any of the provisions of Competition Act. It is the individual decision of the Banks. As such it is denied that all Banks join together/form cartel in respect of charging prepayment interest. Having held that the practice of charging prepayment penalty is not violative of Sections 3(3), 3(2) and Sections 4(1), 4(2)(a)(i) of the Act, the conclusion is that the practice is violative of Section 3(3) is not correct.

viii. Deputy Director General in his report relies heavily on the language of the internal circulars of the banks and a communication of IBA dated 10.09.2003 and contents that stated intent is to discipline the customer and increase income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti-competitive under Section 3(3) of the Act. However, the same is not applicable to SBH, as circulars of SBH does not subscribe to their views/language and charging of prepayment penalty was introduced vide ADV circular No. 2002-03/21 dated 13.06.2002.

ix. Further, it is settled law that the language and the form of agreement cannot be the criterion in any anti-competition investigation. A practice which is not anti-competitive by application of 'rule of reason' cannot by any stretch of imagination be inherently anti-competitive calling for application of 'per se rule' as is concluded in DG report. For the purpose of invoking Section 3(3) of the Act the practice of charging prepayment penalty should ex-facie result in or shall have the probability of resulting in any or any economic consequences enumerated under Section 3(3)(a) to (d).

x. There is no discussion in the DG report whether the practice of charging prepayment penalty ex-facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3). Thus, the findings and the recommendations are mere sweeping generalization and not conclusions based on evidence and material. Under Section 3(3), law permits the commission the presume the violation without further inquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to the relevant market falls foul of any of those parameters. No evidence or data in this regard had been gathered by the DG.

xi. Further, there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provisions of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002. Any practice before being declared as per se anti-competitive due to AAEC under Section 3, factors enumerated under Section 19 of the Competition Act shall be considered. The practice of charging prepayment penalty to be anti-competitive per se, shall ex-facie disclose presence or absence, as the case may be, of any or all factors mentioned in Section 19(3). DG in his report did not have due regard to any of said factors in relation to relevant market and has straight away declare without any hindrance that the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a),(c), (d). The finding of the DG that the practice of charging prepayment penalty does not result in any benefit to consumers and thus factor enumerated in Section 19(3) (d) is present in the practice is not tenable and is based on mere conjectures and surmises and not based on facts and conditions of the relevant market.

xii. In the Indian market, prepayment penalties are finite and not infinite or ballooning as in other markets world over. It can be seen from page 14 of the Deputy Director General report that the rates are heterogeneous and nominal ranging between 1% to 2% among the investigated banks and financial institutions. One of them, namely Axis Bank does not impose any prepayment penalty. Further, prepayment penalties are imposed by the banks and financial institutions only on cyclical repayments and not structural repayments. RBI while giving reply by its letter dated 11.12.2009 to Deputy Director General has categorically acknowledged that prepayment adversely impacts asset liability management. This aspect was completely ignored by the DG.

xiii. Prepayment penalty is a cost to the consumer and is included in the price of services offered by the Banks and Financial Institutions. Section 3 of Competition Commission Act, 2002 declares void, practices in the nature of predatory or monopoly or oligopoly pricing in the market.

xiv. The Act does not concern itself with the restrictive or unfair price terms. Jurisdiction with respect to restrictive or unfair price terms is with Consumer forums under Consumer Protection Act, 1986. It is humbly submitted that restrictive or unfair price terms would come within the definition of anti-competitive practice only when all class of consumer are affected and the price terms are dictated by a monopolist or oligopolies. The practice of prepayment penalty does not affect all classes of consumers that is to say it affects the cost of only borrowers, who are only one class of consumers for the Banks.

xv. Prepayment penalties are good for depositors and stakeholders of Banks. As has been stated earlier if any practice is good for one class of consumers but not so good for another class, then Competition Act, 2002 is not applicable, since prohibiting the practice would adversely affect another class, which in turn leads to misallocation of capital and economic inefficiency. Therefore, the practice of prepayment penalty is beyond the jurisdiction of the Hon'ble Commission.

xvi. The investigation of DG and the findings are to the effect that the practice of charging prepayment penalty are unjustified costs on consumers (Report uses word 'usurious' in paragraph 10.3) and therefore anti-competitive. If prepayment penalty should be prohibited on the ground of 'usury', then only Consumer Courts will have the jurisdiction to do it as cost considerations purely from the perspective of individual consumer is outside the realm of Competition Law in India.

xvii. The judgment of consumer courts relied on by the DG in support of his findings do not even whisper as to whether the practice of charging prepayment penalty is a restrictive trade practice imposing unjustified costs on the individual consumers. Further, the Supreme Court has specifically said in the SBI case that the question of law is left open to be decided in appropriate case.

13.15 Opposite party No. 15, State Bank of India (SBI): The opposite party No. 15 State Bank of India contended in its reply/objections that

i. Director General relies heavily on the language of the internal circulars of Banks and Financial Institutions and IBA Circular dated 10.09.2003 and contends that the purport/intent is to discipline the customer and to increase income. He concludes that the language being monopolistic, the practice of charging prepayment penalty is per se anti competitive under Section 3(3) of the Act.

ii. It is settled law that the language and form of agreements cannot be the criterion but the economic consequences are the criterion in any anti competition investigation.

iii. Under Section 3(3) law permits the Commission to presume violation without further enquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market falls foul of any of those parameters. Therefore, evidence gathered and documents collected during the investigation shall be evaluated from the perspective of presence or otherwise of the parameters laid down Clauses (a) to (d) of Section 3(3) in relation to relevant market. Neither the Director General nor the Deputy Director General had gathered any evidence or data in this regard. Further there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002.

iv. In order to presume that any practice has predictable and pernicious anti-competitive effect and violates Section 3(3) of the Act, the relevant market in which the practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly pricing in the relevant product market. There is no evidence in that regard. It is an observed fact that there is intense competition in the relevant product market. Further, the market participants are regulated by the Government, RBI, NHB, whose mandate is for the protection of public interest.

v. It is settled under Competition Law that presence of highly regulated entities is antithetical to existence of price monopolies. Elements of price oligopoly are absent in the relevant market. Any practice before being declared as anti-competitive due to adverse effect on competition under Section 3, the factors enumerated under Section 19 of the Act shall be considered. To establish the practice of charging prepayment penalty is anti-competitive, the presence or absence, as the case may be of any or all the factors enumerated under Section 19 of the Competition Act is necessary. The DG report has not given due regard to any of the above factors. The DG has straight away declared without any evidence that the practice of charging prepayment penalty has adverse impact on the competition, since its leads to factors under Section 19(3)(a), (c) and (d). CRISIL report demonstrates that prepayment decisions are a function of movement of rates of interest and raising income level called cyclical prepayments and structural prepayments respectively. Prepayment decisions are not influenced by prepayment penalties. It is demonstrated that cyclical repayments were increasing till 2006-07 due to falling interest rates and were negative during the year 2006-07 due to increase in the interest rates. Structural prepayments had been increasing till 2007-08, but it had slowed down during 2008-09 due to global melt down and decreasing income levels. It is expected to show an increasing trend as income levels improve. Therefore the findings that prepayment penalties create a demand side constraint are not correct and are based on considerations other than considerations of relevant market. The findings that prepayment penalties create a demand side constraint are not correct and are based on considerations other than considerations of relevant market.

vi. The finding of the DG that the practice of charging prepayment penalty does not result in any benefit to consumers and thus factor enumerated in Section 19(3) (d) is present in the practice is not tenable and is based on mere conjectures and surmises and not based on facts and conditions of the relevant market. In the Indian market, prepayment penalties are finite and not infinite or ballooning as in other markets world over. It can be seen from page 14 of the Deputy Director General report that the rates are heterogeneous and nominal ranging between 1% to 2% among the investigated banks and financial institutions. One of them, namely Axis Bank does not impose any prepayment penalty.

vii. Further, prepayment penalties are imposed by the banks and financial institutions only on cyclical repayments and not structural repayments. It is elementary that banking means accepting deposits for the purpose of lending. Banks secures funds by way of deposits which is a liability to the bank for specified period at a fixed rate. Pricing of loan is linked to cost of funds banking business has various risks, credit risk, market risk and operation risk etc. Banks are required to manage re-investment risk and it is not feasible to factor the same in the rate of interest alone. Considering the competition in the market to acquire the customer. This process of managing re-investments risks by the banks and financial institutions are known as Asset Liability Management (ALM) and that was the justification offered by the bank, which was brushed aside nonchalantly by the respected DG as not enough justification.

viii. RBI inits reply to the Commission has categorically acknowledged that prepayment adversely impacts ALM. This aspect was completely ignored by the DG. The stated objective of Competition Act, 2002 as per its preamble is to prevent practices having adverse effect on competition, to promote and sustain competition in the markets, to protect the interests of the consumers.

ix. The term 'the Consumer' under the Competition refers to all classes of consumers and not individual consumers. Therefore, the Commission while investigating the practices in the market is required to holistically consider whether the practice affects all classes of consumers. If the alleged practice is not that beneficial to one class of consumers but are beneficial to another class of consumers, the Commission cannot take the side of only one class of consumers and declare the practice as illegal.

x. The DG failed to appreciate the difference between Restrictive Trade Practice and a practice having appreciable adverse impact on competition and thus misdirected himself in assuming jurisdiction of the Commission. The investigation of DG and the findings are to the effect that the practice of charging prepayment penalty unjustified cost on consumer (word 'usurious' is used in the report) and therefore anti-competitive. It is submitted that if prepayment penalty should be prohibited on the grounds of 'usury', then only Consumer Court will have the jurisdiction to do it as cost consideration purely from the perspective of individual consumer is outside realm of Competition Law in India.

xi. The judgments of consumer courts relied upon by the DG in support of his findings were under Consumer Protection Act, 1986 and not under the Competition Law. Even in those judgments there is no whisper as to whether the practice of charging prepayment penalty is a restrictive trade practice imposing unjustified costs on the individual consumers. The judgment was based on facts, which disclosed that prepayment charges were levied in that case even though loan was not disbursed and merely because the complainant has chosen to avail the loan from other Bank instead of Respondent Bank. The consumer courts rightly held that what was charged was not prepayment penalty but penalty for not taking the loan though the Bank which was ready to give the loan. The case is not at all representative of instances, where Banks charge prepayment penalty for prepayment after loan was disbursed and utilized by the borrowers. The order of Supreme Court in the case is not an authority for the proposition that Banks cannot charge prepayment penalty. The reliance on the judgment is misplaced. It is humbly submitted that whatever material respected DG has adverted to in his report refers to prepayment penalty for an unavailed and unutilized loan from which no parallel can be drawn. On this ground alone the findings of DG deserved to be rejected.

13.16 Opposite party No. 16, Vijaya Bank: The opposite party No. 16 Vijaya Bank in its reply/objections contended that

i. The Asset Liability Management (ALM) as justifications for levying the prepayment penalty charges by the Banks was not conceived by the DG or the Deputy Director General in its true perspective and has misconstrued and traced it as a root in preventing the customer from trying to get better bargain, disciplining the borrower and kill competition which has led the DG to arrive at the wrong conclusion. As regards the argument put forth by DG on the issue of ALM is concerned, that if sometime the bank loses in a declining interest scenario, it also gains in increasing interest scenario and all such eventualities are generally factored into by working out the cost of funds for either the fixed interest or floating rate lending's is not correct. This is because no bank can factor all these eventualities in their cost of funds. If large scale repayment of loans takes place. The presence of prepayment penalties offers incentive to the banks to apply upward interest rate changes. (in a typical scenario where rates are on rise) only to future customers and not to existing customers. Thus, a borrower choosing against refinance option gets the benefit of lower interest rate. Thus, this practice has given discernable benefits to the customers in the Indian Market.

ii. The prepayment penalty is an ALM tool. It is meant to cover the costs associated with reinvestment risk faced by the banks so that they can remain viable. This is proving to be beneficial to the depositor as explained above. It has been contended that prepayment penalty as ALM tool is eminently reasonable as long as it is meant to cover the costs associated with reinvestment risk. There is enough evidence in the Indian Market that the rates of prepayment penalty ranging from 1% to 2% as quoted by the DG report are aimed at covering the cost of reinvestment risk for the banks so that they can remain viable and pay the depositors the agreed rates. That is the reason why government and RBI did not frown on those rates till date.

iii. Findingin the report that prepayment penalties are anti-consumer is baseless for another reason also. Banking means accepting deposits for the purpose of lending. Banking business has various risks like credit risk, market risk and operational risk etc. Prepayment by a borrower generates re-investment risk for the bank. Banks are required to manage this re-investment risk it is not feasible to factor the same in the rate of interest alone considering the competition in the market to acquire a customer. The process of managing re-investment risks by the banks and financial institutions is known as Asset Liability Management (ALM) and that was the justification offered by the bank, which unfortunately was brushed aside nonchalantly by the respected DG as not enough justification.

iv. The findings of the DG that NHB's imposition of prepayment charges is low and practically stable for a reasonable period. Thus imposition of prepayment levy by NHB was a business decision and, therefore, not anti-competitive, but that being charged by other Banks or Home Loan Finance Companies are competitive is highly unsustainable and without any basis or merits. In fact levying prepayment charge is a business decision. The Law Lexicon has given the word "business" a wide import and it means a trade or profession at which one works regularly and business is ordinarily for profit.

v. In the present instance, NHB is doing wholesale bulk refinance for profit also and charging less prepayment charges as their customer base are very less which are mainly banks and HFC therefore, cost of prepayment charges are also less. But, the Banks who receives the amount from NHB disburses the same to lakhs of customers and hence, to maintain more customer base for prepayment charges the cost involved including cost of reinvestment risks is more. This will enable the bank to repay the prepayment charges to the NHB, if the banks receive prepayment from customer. It is like NHB charging lesser interest for bulk refinance to Banks, whereas Banks is charging more interest from their customers. Thus, the justification attributed to NHB for collection of prepayment charges as "business decision" is equally applicable to banks. RBI while giving reply vide its letter dated 11.12.2009 to the Deputy Director General has categorically acknowledged that prepayment adversely impacts ALM. This aspect was completely ignored by the DG.

vi. The Competition Act does not override the provisions of the Banking Companies Act nor does it override the powers of the Regulatory Authority i.e. RBI. The respected DG failed to appreciate the said settled position and assumed jurisdiction in the matter which is totally unsustainable. Further, Section 3 of Competition Commission Act, 2002 declares void, practices in the nature of predatory or monopoly or oligopoly pricing in the market. The Act does not concern itself with the restrictive or unfair price terms. Jurisdiction with respect to restrictive or unfair price terms is with Consumers forums under Consumer Protection Act, 1986. It is humbly submitted that restrictive or unfair price terms would come within the definition of anti-competitive practice only when all class of consumer are affected and the price terms are dictated by a monopolist or oligopolies. The practice of prepayment penalty does not affect all classes of consumers that are to say it affects the cost of only borrowers, who are only one class of consumers for the Banks. Prepayment penalties are good for depositors and stakeholders of Banks. As has been stated earlier if any practice is good for one class of consumers but not so good for another class, then Competition Act, 2002 is not applicable, since prohibiting the practice would adversely affect another class, which in turn leads to misallocation of capital and economic inefficiency.

vii. The practice of prepayment penalty is beyond the jurisdiction of the Hon'ble Commission. Further, Vijaya Bank does not levy prepayment penalty in case of structural prepayment. Only cyclical prepayment attracts prepayment penalty for the reason that marginal cost of prepayment is significant and there is comparative cost advantage in taking new loan. Under Section 3(3) law permits the Commission to presume violation without further enquiry only and only if any trade practice tested on the parameters laid down in Clauses (a) to (d) of Section 3(3) in relation to relevant market falls foul of any of those parameters. Therefore, evidence gathered and documents collected during the investigation shall be evaluated from the perspective of presence or otherwise of the parameters laid down Clauses (a) to (d) of Section 3(3) in relation to relevant market. Neither the Director General nor the Deputy Director General had gathered any evidence or data in this regard.

viii. Further there is no discussion in the report as to how the practice of charging prepayment penalty per se limits or controls provision of financial services, although it is concluded that the practice is violative of Section 3(3)(b) of Competition Act, 2002. DG report did not have due regard to any of the factors given under Section 19(3) in relation to relevant market. He has straight away declared without any evidence that the practice of charging prepayment penalty has AAEC since it leads to factors under Section 19(3)(a), (c), (d).

Indian Bank Association (IBA): The Indian Banking Association in its reply contended that

i. The banking industry in India is regulated by and under the provisions of the Banking Regulation Act, 1949 and the Regulatory Authority there under is the RBI. RBI has not found this practice of levying prepayment penalty as either unfair, or unreasonable, or restrictive or illegal. It is submitted that it is within the exclusive domain of the regulator to decide if a particular practice violates the essentials of the Banking system in the country. On the other hand, RBI has duly approved the said practice as would be evident from the factual submissions made hereunder. As such, neither the DG nor this Hon'ble Commission would have the jurisdiction to go into the issue in view of the fact that the said practice of levying prepayment penalty is not only reasonable but also legal and legitimate. It is also in the larger interest of developing a strong and healthy Banking system in the country to support the economic development of the country.

ii. Prepayment penalty is levied in view of and under express terms of a contract entered into between the Bank and the Customer. If the terms of a contract are one sided or unconscionable (which is not a fact in the present case), the remedy would be to approach a Civil Court for the annulment of the contract as a whole or getting a declaration from the Competent Court that the particular provision is unconscionable. For this reason also this Hon'ble Commission ought not to interfere in a practice which has been long established and consistently followed by the entire banking industry and cannot by any stretch of imagination be considered as unfair or unconscionable.

iii. The parties are bound by the terms and conditions of the contract. DG has not considered the subject in issue raised by the informant comprehensively in his report. The evidences/documents collected by the DG during the said investigation/inquiry are highly inappropriate to come to a definitive conclusion particularly on an issue which affects the banking and financial industry at large. DG in his report, on the one hand, stated that the concluded that the allegations made by the informant under Section 3(1), 3(2) read with 4(1), 4(2)(a)(i) are found to be untrue and on the other hand concluded that the practice of charging prepayment penalty levied by the banks/financial institution to the consumers is anti-competitive and is in violation of Section.

iv. Section 3(1) read with Section 3(2) is inpari materia with Section 1 of Sherman Act 1890 of United States of America, which is based on 'rule of reasonableness' enunciated by the courts in United States and followed by Indian Courts under MRTPC, which now stands repealed and replaced by Competition Act. Deputy Director General in his report after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' and having found that the practice has reasonable economic justification has given a finding that the practice is not violative of Section 3(1) of the Competition. He has rejected the allegations of market dominance and abuse thereof by the Banks and Financial Institutions and found that Banks and Financial Institutions and IBA have not violated Section 4(1), 4(2)(a)(i) of the Act. Therefore, it is submitted that the Deputy Director General having given a finding that the practice of charging prepayment penalty is economically reasonable and the persons investigated are not in dominant position in the market to determine prices or control services, ought not to have come to a contrary and inconsistent conclusion, on the basis of same evidence that Banks and Financial Institutions have violated Section 3(3) of Act. DG report relies heavily on the language of the internal circulars of banks and financial institutions and IBA circular dated 10.09.2003 and erroneously concluded that the language of aforesaid letters are monopolistic, the practice of charging prepayment penalty is per se anti competitive under Section 3(3).

v. DG failed to consider that language in form of agreement cannot be the criterion and the economic consequences are the criterion in any anti competition investigation before coming to definitive conclusion.

vi. DG has not explained whether practice of charging prepayment penalty ex-facie leads or has led to predictable and pernicious economic consequences enumerated under Section 3(3) of the Competition Act.

vii. It is settled law that for the purpose of invoking Section 3(3) of the aforesaid Act, the DG has to give appropriate and sufficient reasons that the practice of charging prepayment penalty should ex-facie result in or shall have probability of resulting in any or all the economic consequences enumerated under Section 3 to (d) of the Act. The DG miserably failed to consider the above provisions and gave the sweeping findings/recommendations which are erroneous and misconceived. It has been further contended that the evidence gathered and documents collected during the investigation shall be evaluated from the perspective of inherent principles laid down under Clauses (a) to (d) of Section 3(3) of the Act in relation to the relevant market. The DG during the investigation failed to gather any appropriate evidence or data in the aforesaid perspective and miserably failed to consider/explain as to how the practice of charging prepayment penalty per se limits or controls provision of financial services provided by the Banks and Financial Institutions to the Consumers and surprisingly came to the conclusion that the aforesaid practice is violative of Section 3(3)(b) of the Act, which is erroneous, misconceived and not in conformity with the legal principles involved on the subject in issue.

viii. DG in his report failed to consider in order to presume that any economic practice has any predictable and pernicious anti-competitive effect, which violates the provision of Section 3(3) of the Act, the relevant market in which the said practice is carried on should necessarily be a monopoly or oligopoly market and the products are subjected to either monopoly pricing or oligopoly pricing in the relevant product market. It is pertinent to mention herein that no iota of evidence/documents has been collected and considered by the DG which proves the aforesaid market and pricing condition is present in the relevant market. On the contrary, there is ample evidence on record to general public that there is intense competition in the relevant product market (home loan market) as there are large numbers of service providers. The service providers in the said market are highly regulated by the relevant policies enunciated by the government, RBI and NHB whose mandate is protection of public interest at large.

ix. The DG failed to consider in his report that it is a settled law that presence of highly regulated entities are antithetical to existence of price monopolies or oligopolies. Therefore, the findings of DG that the practice of charging prepayment penalty is monopolistic and anti-competitive is a fallacy.

x. DG in his report miserably failed to consider relevant fact before coming to the conclusion the persons investigated under the relevant market control 95% of the market. It is pertinent to mention here that the aforesaid conclusion of the DG in his report is a fallacy as the HFCs have a considerable share of 35% of the relevant home loan market and remaining share is with the banks and other institutions.

xi. The DG in his Report has in simpliciter manner accepted the allegations of the informer without any cogent evidence on record and has made unjustified and erroneous assumption on the basis of circular dated 10.09.2003 of IBA and the internal circular of Banks and Financial institutions that there exists an agreement among the service providers that limits or controls the provision of services in the relevant market within the meaning of Section 3(3) of the Act.

xii. The DG completely failed to appropriately consider the relevant circular of the RBI, although it was on record and completely misinterpreted the contents of the aforesaid circular just for the purpose of coming to the erroneous conclusion and justification that the aforesaid practice is anti-competitive as per the aforesaid relevant provision of the Act. It is further submitted that the DG also failed to consider that the relevant market had grown exponentially after the year 2003 and the said growth is mainly attributable to the entry of Scheduled Commercial Banks into the relevant market and therefore, the said IBA circular and the practice of charging prepayment penalty has not in any way limited or controlled the availability of home loan products in the relevant market. Thus, the definitive conclusion of the presence of anti-competitiveness in the relevant market due to the aforesaid practice by the DG in his report is completely erroneous, misconceived and a fallacy.

xiii. The DG in his Report abysmally failed to consider/explain that any practice before being declared as per se anti-competitive due to appreciable adverse effect on the competition under Section 3(3) of the Act, the inherent factors enumerated under Section 19(3) of the Act ought to be considered. It is further submitted that the DG has not considered the aforesaid factors with sufficient reasoning in relation to the relevant market and straight away declared without any cogent evidence that the practice of charging prepayment penalty has appreciable adverse effect on the competition in the relevant market, which are devoid of any substance. It is pertinent to mention herein that there is ample evidence by which one can observe that there are eventually no barriers for the new entrants to enter into the relevant market as is evident from the fact that NHB which is regulatory authority for granting license to new HFCs has been receiving applications from new HFCs and had granted licenses to 3 new HFCs during the year 2008. It is relevant to mention herein that if the practice of prepayment penalty has any correlation to entry into the relevant market, then there would not be new applications for registrations before NHB. Similarly, it is also a fact that Banking Industry has seen entry of new private sector banks in considerable numbers in the last decade and various applications for banking license are pending with RBI. Hence, there is ample evidence which can easily substantiate the fact that there is no entry barrier for new entrants in the relevant market much less a correlation to conclude a finding that the said practice has appreciable adverse effect on competition per se. It is pertinent to mention herein that the DG in his report completely failed to consider the well known fact that the prepayment decisions are a function of movements of rates of interest and raising income level, which is called as cyclical prepayments and structural prepayments respectively and therefore, the prepayment decisions are not influenced by prepayment penalties. It is also relevant to mention herein that the aforesaid facts can be demonstrated through the fact that cyclical repayments were increasing till the year 2006-07 due to falling interest rates and were negative during the year 2006-07 due to increase in the interest rates. The structural prepayments had been increasing till the year 2007-08 but it had slowed down during the year 2008-09 due to global melt down and decreasing income levels. It is very likely that the structural prepayments trend will show an increasing trend as the income levels of the consumer improved. Therefore, the findings in the said DG report that the prepayment penalties create a demands side constraint is baseless as it is based on the considerations other than the relevant factors of the home loan market. It has further been contended that none of the banks and financial institutions in the market levy prepayment penalty in case of structural factors and the said fact is accepted by the DG in his report. It is further submitted that at present only cyclical prepayments attract a minimal prepayment penalty and it would be obvious that cyclical prepayment would happen only when marginal cost of refinance is insignificant and there is comparative cost advantage in taking new loan.

xiv. The DG in his report failed to consider appreciate the fact that the banks and financial institutions are financial intermediaries channel to put savings in the economy into the investment. In other words, the availability of credit to the consumers is a function of loan able funds. The banks and financial institutions have to consider the fact that the aforesaid loan able funds will be available at low cost and the benefit of the same should be provided to the consumers. It has further been contended that the Securitization is a disintermediation process that enables banks and financial institutions to raise funds from investors selling down loans backed by mortgage security. The investors buying securitization instruments besides good rate of return for their investments also look for certainty in cash flows. It is empirically established in the structured finance literature that the practice of prepayment penalty enhances certainty of cash flow and serves as incentive for investors in securitization instruments. Therefore, as a natural corollary, the said incentive translates into lower rates on the securitized instruments, which in turn results in low cost loan able funds for the banks and financial institutions. The said low cost loan able funds reduces the interest rates and costs to the home loan borrowers in the relevant market. Thus, the practice of charging prepayment penalty enhances consumer welfare rather than affecting them adversely.

xv. DG in his report completely disregarded the ALM aspect and brushed aside nonchalantly as not enough justification, which is highly misconceived and erroneous proposition. In order to understand the reasoning behind prepayment charges levied by the various banks and financial institutions, it is necessary also to understand the ALM of the banking industry. Banks and other financial institutions exposed themselves to various kinds of risks such as credit risk, interest risk and liquidity risk. ALM is an approach and tool that provides these institutions with protection that makes such risks acceptable. ALM enables banks and financial institutions to measure and monitor risks and provide appropriate strategies for their management. In today's global financial and commercial scenario ALM has become an integral feature essential for sustaining the banking industry. This is the reason why the RBI has issued various circulars and guidelines in this regard time to time but the same was erroneously not considered by the DG in his report. The RBI vide its circular dated 10.09.1998 has decided to introduced the ALM system as a part of risk management and control systems in banks.

xvi. DG in his report completely failed to consider the most essential part of the letter of RBI dated 11.12.2009, which has been sent by the RBI while giving reply to the query of the Deputy Director General during the course of the investigation. The said RBI letter categorically stated that the bank generally levy charges for foreclosure of loan as it adversely impacts their ALM. The RBI in its letter further stated that no further action is contemplated in the matter and also informed that there are no proceedings on prepayment penalties against any of the banks pending with the RBI. The DG in his report completely disregarded the aforesaid concluding part of the contents of the aforesaid letter of RBI.

xvii. The DG in his report failed to appreciate the totality of economic factors and interest of all classes of consumers required to be considered for the subject in issue in the relevant market under the Act. It has been contended that the DG with misconceived notion misdirected the entire investigation and restricted it to only one segment of consumer interest and miserably failed to consider all the segments of consumers' interest.

xviii. DG in his report completely failed to consider the purpose and objective of the Act. As per preamble of the aforesaid Act, the Act has been passed to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in the markets in India, and for matters connected therewith or incidental thereto. Therefore, the main objective of this Hon'ble Commission is to protect the interest of consumers and to ensure freedom of trade carried on by other participants in the market and for that purpose the Hon'ble Commission have to maintain balance between the "interest of consumers" and "freedom of trade" under the Act.

xix. The DG in his report completely failed to maintain the aforesaid balance to achieve the purpose and objective of the Act and even considerably failed to appreciate the interest of consumers at large as he did not consider the overall economic interests of all segments of consumers prevalent in the relevant market. As we have already submitted and demonstrated in the a foregoing paragraphs of this reply that the aforesaid practice of prepayment penalty is ultimately beneficial for the large segment of consumers and including the segment who is allegedly claiming herein that they are adversely affected by the aforesaid practice.

xx. Hence, the DG report is bad for ignoring the "balancing of interest rule" while applying the provisions of the Act. The Bankers deal with the money of the depositors, who are large segment of consumers dealing with banking industry at a large. This is the reason why there are host of regulations protecting depositors' interest and RBI is entrusted with the primary responsibility of protecting them. Therefore, the DG before establishing authoritative rules of conduct on the part of banks and gave finding that the said practice of prepayment penalty is anti-competitive which is highly erroneous and will affect immensely the interests of large segment of depositors whose hard earned savings would be at stake with every change in the way banks are allowed to conduct their business. It has been contended that if the aforesaid practice does not appeal to borrowers and to their narrow notions of justice and equity actuated by self interest would not make the practice per se anti-competitive as the balance of interest rule and the overall economic scenario in the relevant market has been ignored by the DG in his report which is highly objectionable and therefore, the recommendation and findings of the said report ought to be rejected by this Hon'ble Commission.

xxi. The findings of the DG in his report by citing the example of USA and Taiwan market that the overwhelming international trend has been towards a situation where there is no exit load on the borrowers in the home loan market is highly misconceived erroneous as it is based on irrelevant material and fallacious reasoning. The Indian Home Loan Market is diametrically opposite to the relevant market in United States. The relevant Indian market is a developing market in comparison to the market of USA and the Indian Housing Finance Companies and banks offer plain vanilla loans to the home loan borrowers and are simple contracts, which do not contain complicated structures as in the case of USA. The relevant market in USA is regulated both by Federal Legislation as well as respective legislation passed by the States in this regard. In USA, the said law combines both regulation and consumer protection and there is no umbrella legislation to protect only the interest of the consumers as in the case of India where the consumer Commission/ Forums under the Consumer Protection Act, 1986 are functioning for over two decades. The scope of the Consumer Act has been widened to include both restrictive and unfair trade practices to protect the interest of the Consumers exclusively.

xxii. The Consumer Financial Protection Agency Act, 2009 (hereinafter referred as "CPFA Act") referred to by the DG in his report is umbrella legislation for consumer protection in USA to unify the existing rules and regulations on consumer protection at one place. The Act itself does not seek to ban the practice of prepayment penalty in the Home Loan Market. The amendments to Section 803 of the Alternative Mortgage Transaction Parity Act, 1982 (hereinafter referred as "AMTP Act") by CPFA Act do not ban prepayment penalty in USA as suggested by the DG in his report. The background to the said amendment is that in many States in USA under their respective usury laws do not permit home mortgages except on the basis of fixed rate amortizing mortgages. The AMTP Act, 1982 was passed to override state laws and to allow banks to make loans with terms that may obscure the total cost of the loan. This led to various exotic new mortgages and many borrowers failed to understand impact of the same which led them to debt trap and default The said exotic mortgages are considered as the main reason for sub-prime crises. It is further submitted that the CFPA Act, 2009 by amending AMPT Act, 1982 has not brought the exotic mortgages within the purview of regulation by Consumer Financial Protection Agency. Therefore, it is amply clear that the CFPA Act, 2009 does not ban exotic mortgages and only restricted the complete freedom of Banks to offer exotic mortgages.

xxiii. DG in his report referred to judgment of Consumer Courts in support of his findings and misconstrued the findings of the Consumer Forum. The Hon'ble Supreme Court in its order dated 19.02.2008 has categorically mentioned that the question of law relating to the subject in issue is raised in appeal before Hon'ble Supreme Court is left open to be decided in an appropriate case. This relevant portion of the said order of Hon'ble Supreme Court of Indian in said matter has been completely ignored by the DG in his report and DG erroneously came to the conclusion that the question of law relating to the subject in issue has been settled by the highest court law in India.

xxiv. DG in his report categorically given a finding that the imposition of prepayment levy by National Housing Bank is a business decision and cannot be said to be anti-competitive. If the said practice of NHB is not anti-competitive then why the same practice adopted by the banks and Financial Institutions to manage their Asset Liability Match to maintain the profitability of the organization and long term sustainability of the system, is in anyway anti-competitive under the provision the Act by the same analogy and reasoning/findings given by the DG in his report.

POINTS FOR DETERMINATION:

15.1 In identifying the key issues for determination in this case, it is important to be fully conscious of the fact that its various dimensions include significant macro-economic factors and financial stability implications on the one hand, and consumer interest on the other. For the banking sector, prepayment charges are part of their overall strategy and asset liability management, while the consumer tends to look at them as barriers to case of exit. It is also to be borne in mind that related issues involved could attract other statutes also and may be spread over the domains of various agencies/entities like the Reserve Bank of India (RBI), Banks Ombudsman, Consumer fora under the Consumer Protection Act, 1986 etc.

15.2 The information apparently arises from a consumer perception that once an agreement is reached on a home loan with a bank, it uses its dominant position to levy a pre-payment charge if the borrower wants to prepay, even though new customers may be charged a lower interest rate by other banks or even by the same bank. The issue has got exacerbated due to a continuing falling interest regime for several years till recently.

15.3 The banks perceive the issue more as a business issue in which they have to look after the interest of all the stake holders, including the depositors, and not only of the home loan borrowers. At any point of time, therefore, their interest regime, and consequential contractual obligations for loans advanced at that time, relate to their own internal financial calculations for asset liability match etc., over a medium/long term time horizon. Any transaction which deviates from the scheme of things, on the basis of which contractual loan agreements have been arrived at, is perceived as a cost by them and, therefore, they consider it a legitimate business requirement to recover in full or part such transaction fee for that particular transaction; transaction in the present instance being prepayment.

15.4 The Reserve Bank of India has given discretion to banks to take their own decision in regard to prepayment charges on home loans. This discretion has been exercised by different banks to come to different terms and conditions. This has resulted in significant variations in the various terms for prepayment of home loans and the prepayment charges also vary. Ministry of Finance, Government of India has also issued certain directions on the subject on May 4/5/2010.

15.5 We have noted that prepayment charges are part of the overall agreement between a bank and a borrower, and are linked to the interest charged for the home-loans. This interest is itself part of the overall interest regime in the country, which in turn is one of the elements of the monetary policy laid down by the RBI, some of the other elements having been mentioned earlier in the order. It would, therefore, be useful to quickly review the macro-economic implications of interest rates before we move to actual identification and determination of key issues.

15.6 It is theorized that monetary policy can establish ranges for inflation, unemployment and economic growth, and a stable financial environment is created in which savings and investment can occur, allowing for growth of the economy as a whole. Interest rates play a crucial role in the macro management of an economy. Interest rates are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation and unemployment. For example, interest rates are the main determinant of investment on a macro-economic scale. Broadly speaking, if interest rates increase across the board, then investment decreases, causing a fall in national income. A central bank (RBI in India), can lend money to financial institutions to influence their interest rates as the main tool of monetary policy. Usually central bank interest rates are lower than commercial interest rates since banks borrow money from the central bank then lend the money at a higher rate to generate most of their profit. By altering interest rates, the central bank is able to affect the interest rates faced by everyone who wants to borrow money for economic investment. Investment can change rapidly in response to changes in interest rates and the total output. By setting interest rates the central bank can also affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply. And a reduction in money supply reduces inflation.

15.7 Monetary policy actions are transmitted to the rest of the economy and as specified by RBI in its report on currency and finance - 2008-09 through changes in financial prices (e.g., interest rates, exchange rates, yields, asset prices, and equity prices) and financial quantities (money supply, credit aggregates, supply of government bonds, foreign denominated assets). The RBI also points out that in recent years, financial price channels have attracted greater attention, partly reflecting concerns about stability of money demand functions. With the short-term interest rates emerging as the predominant instrument of monetary signals worldwide, the interest rate channel is the key channel of transmission.

15.8 Let us now move on to the macro-economic importance of home-loans and the treatment given to these loans by RBI, within the overall interest rate regime. Home-loans channelize savings into real assets directly, fueling growth in other sectors through forward and backward linkages and thus ensuring growth in employment. It helps other sectors like steel, cement, brick, etc. to grow. People engaged in construction work largely belong to the lower pyramid of the economy. Hence, it provides employment to a larger section of the society, thereby contributing to achievement of the goal of inclusive growth and employment generation.

As per the priority sector lending circular by RBI, home loans to weaker sections of society are considered as priority sector lending and hence eligible for banks to charge lower interest rates on home loans. The circular further categorized housing loans as loans granted for construction, additions, alterations, repairs etc. as follows:

I. Direct housing loans to individuals by banks upto Rs. 10 lakh for construction of houses in urban and metropolitan areas will be eligible for inclusion under priority sector. Further, banks with the approval of their Boards may also extend direct housing loans upto Rs. 10 lakh in the rural and semi urban areas and cost be considered as part of priority sector advances.

II. Loans granted by banks upto Rs. 1 lakh in rural and semi urban areas and Rs. 2 lakh in urban areas for repairs, additions and alterations etc. to individual borrowers, would be reckoned as priority sector advances.

III. Assistance granted to any governmental agency for the purpose of construction of houses exclusively for the benefit of SC/STs, where the loan component does not exceed Rs. 5.00 lakh per unit and all advances for slum clearance and rehabilitation of slum dwellers would be classified as priority sector advances as well as weaker section advances.

IV. Besides the governmental agencies, assistance given to non-governmental agencies approved by National Housing Bank (NHB) for the purpose of refinance will also be eligible for all the categories of borrowers as applicable to governmental agencies as priority sector advances.

V. All investments in bonds issued by NHB/Housing and Urban Development Corporation Limited (HUDCO) exclusively for financing of housing, irrespective of the loan size, per dwelling unit, will be reckoned for inclusion under priority sector advances.

15.9 Home loans even otherwise, are considered an important area of the loan portfolio of banks largely spurred by the pressure on housing. Financial Institutions specifically for housing finance such as HDFC were set up in this context. Involvement of banks and non-banking financial institutions in home loans is reflected in the large number of players and in competitive interest rates.

15.10 It is in the above backdrop that the decisions to establish the National Housing Bank (NHB) was announced in the Union Budget for 1987-88, which was then set up on July 9, 1988 under the National Housing Bank Act, 1987. NHB is wholly owned by RBI, and extends refinance to different primary lenders. The following table indicates the trend of refinance released during the last few years:

Trend of Refinance released during last few years

Year     Disb. (Rs. Crore)

Year

Disb. (Rs. Crore)

1998-99

758

1999-00

842

2000-01

1008

2001-02

1025

2002-03

2710

2003-04

3253

2004-05

8062

2005-06

5632

2006-07

5500

2007-08

8587

2008-09

10854

15.11 The concept of, and issues relating to, pre-payment charges need to be appreciated and evaluated in the above context. We have also noted that NHB, which is also the regulator for Housing Finance Companies (HFCs), itself charges PPC of 1% as a refinancer of the retail home loans of the HFCs scheduled banks and other financial institutions. Even Government of India charges prepayment levies from PSUs and State Governments for making payment earlier than scheduled. It can also be argued that PPC is nothing but the premium for call options, and if this is not justified, could this logic be further extended to question the validity of the premium on call and put options in financial sector in general? We have also noted that prepayment charges are levied by banks for other loans also, like personal loan, car loan etc.

15.12 In the light of the above brief review, we feel that we need to be very careful in understanding the issues involved holistically, and then go on to selecting only those issues for our determination which fall within the four walls of the provisions of the Competition Act, 2002. We note that Section 62 clearly provides that the provisions of the Act are in addition to, and not in derogation of, the provision of other statutes, and are conscious of the fact that there could be grey areas of overlap or apparent conflict between provisions of this Act and other statutes, and the domains assigned to different regulators/entities. We, therefore, need to adopt an approach of harmonious construction of the relevant provisions of the statutes and deal with issues before us in a manner which helps to bring greater clarity and consensus in the respective roles of CCI and other existing regulators/entities and not raise avoidable turf issues.

15.13 We have carefully considered, in the above background, the essential issues raised by the informant in the instant case, the submissions made by the opposite Parties before the DG and the fact unearthed by the DG in his report dated 16.12.2009 as also the replies filed by the parties in response to the notice of this Commission dated 05.01.2010. A copy of DG's report was also furnished to the informant who didn't respond. The following issues arise for consideration and determination in the case:

Whether and what kind of pre-payment charges are being levied by banks/HFCs in regard to home loans?

Whether there is any agreement to impose prepayment charges among the opposite parties who are, in effect, supplying the service of home loans?

Whether there is any agreement of the nature mentioned under Sub-section (3) of Section 3 or existence of any effect of the nature mentioned under Clauses (a) to (d) to Sub-section (3) of Section 3 of the act or some "appreciable adverse effect on competition" in India in the context of Sub-section (3) of Section 19 due to imposing of pre payment charges by some banks?

Is there any evidence of dominance or its abuse in terms of Section 4 of the Act by any of the banks / HFCs investigated by the DG?

Does the fact that a borrower has to bear a cost for switching to another bank, or exiting altogether by paying balance amount due, by itself can be said to limit the competition in home loan market as it can be said to limit his/her choice in terms of changing the service provider or to exit altogether?

FINDINGS:

ISSUE No. 1: Whether and what kind of pre-payment charges are being levied by banks/HFCs in regard to home loans?

16.1 It is an admitted fact that the banks / HFCs investigated impose prepayment charges. This is also a finding by the DG, which has not been refuted by the Opposite Parties. The Commission therefore finds that at least the banks / HFCs questioned in the instant case do impose prepayment charges.

16.2 However, whether or not all banks/HFCs engaged in the business of offering retail home loans impose this charge is not brought out by the investigations by the DG. The Commission also notes that Axis Bank is at least one exception in this regard as it does not levy prepayment charges. The Commission further notes that the terms relating to prepayment charges vary from bank to bank, including in regard to the quantum of such charges and the conditions of their applicability as is apparent from the following table furnished by DG in his report:

Sl. No.

Name of Banks

Prepayment penalty charged by the Bank

1.

Indian Overseas Bank

1% on the prepaid amount in case of term loan and other loans where the repayment of the loan exceeds one year.

2.

Punjab National Bank

2% on the amount outstanding at the time of prepayment

3.

Corporation Bank

1%-2% in the event of takeover of the loan by other Bank/FIs on the amount prepaid.

4.

ICICI Bank Ltd.

2% in the event of repay of entire outstanding dues.

5.

Allahabad Bank

In case of term loan upto Rs.10.00 lacs, if liquidated out of own sources/own generation - Nil.

In case of availing loan from some other Banks/Institutions - 2% of outstanding loan plus tax.

In case of term loan above Rs.10.00 lacs - 2% of outstanding loan plus tax.

6.

Vijaya Bank

1% to 2% in the event of takeover of the loan by other Banks/FIs on the amount prepaid.

7.

Oriental Bank of Commerce

In case of term loan -1% on the amount outstanding and 2% in case of housing loan on the outstanding balance.

8.

Canara Bank

2% in the event of transfer of the loan to the other Bank/FIs on the outstanding amount.

9.

Punjab & Sind Bank

0.5% to 2% on the amount outstanding. In case of commercial loans - no charges, if the loan has run for at least 360 days.

10.

State Bank of Hyderabad

2% on the amount prepaid in the event of transfer of the loan to the other Banks/FIs.

11.

State Bank of India

2% penalty on the amount prepaid in excess of normal EMI dues should be levied in case of preclosure of home loans within 3 years from the date of commencement of repayment.

12.

LIC Housing Finance Ltd.

1% to 2% on the amount outstanding (levy of 1% of the amount prepaid as repayment charges if such prepayment is made within a period of 5 years from the date of first disbursement and the amount of loan sanctioned is over Rs.50,000.00.

13.

Deutsche Post Bank

Loan against Residential Property (LARP)/Top up/Easy Plus Loans

Full prepayment - 3% on the outstanding principal plus taxes.

Full prepayment within 6 months of the loan disbursement - 5% on the outstanding principal plus taxes.

Part prepayment - 3% plus taxes on the amount repaid.

14.

HDFC Bank

For Auto Loan/Two Wheeler Loan - Foreclosure Fees ranging from 3% to 6%. For Personal/Business/Self Employed Professional Loans-

Foreclosure fees of 4%. Waiver of charges, if any may be done by the relevant authority as per a Deviation grid designed for the purpose.

15.

HDFC Ltd.

Adjustable Rate Home Loan (ARHL)

If a prepayment is made within 3 years of the first disbursement under Adjustable Rate Home Loan (ARHL) option early redemption charges of 2% of the amount being prepaid is payable if the amount being prepaid is more than 25% of the opening balance.

Fixed Rate Home Loan (FRHL)

Redemption charges of 2% of the amount being prepaid is payable.

16.

Indian Bank

For Term Loans at 2.25% and 2% for Home Loans (inclusive of Service Tax) of outstanding balance/Drawing limit whichever is higher.

17.

Axis Bank

No prepayment penalty.

16.3 As such, no uniform practice can be said to have been adopted by Banks/HFCs in regard to levy of prepayment charges.

17 ISSUE No. 2: Whether there is any agreement to impose prepayment charges among the opposite parties who are, in effect, supplying the service of home loans?

17.1 The underpinning economic philosophy of Section 3 given in the Preamble to the Act (herein referred to as the Act) is "to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets". The term competition is not defined under the Act so we must rely on accepted linguistic definition of the word in the context of markets or business. Merriam-Webster dictionary defines competition in business as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms."

17.2 Section 2(b) of the Act defines "agreement" as follows: "agreement includes any arrangement or understanding or action in concert,-

(i) whether or not, such arrangement, understanding or action is formal or in writing; or

(ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

17.3 Section 3(1) of the Act states, "No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India."

17.4 Section 3(2) of the Act stipulates, "Any agreement entered into in contravention of the provisions contained in Sub-section (1) shall be void."

17.5 To apply the provisions of Section 3 of the Act, it is imperative to understand the concept of market and appreciate the economic principles of competition. The basic requirement of any market is the existence of the forces of supply and demand. A good or service is supplied or demanded only because it has some utility. Elements or activities that go into creation of utility combine to form forces of supply while those that ultimately consume that utility represent forces of demand. The end consumer of any good or service is one who eventually consumes the utility of that product. Entities that produce, distribute, store or control goods or services are entities that constitute suppliers. Entities who consume are consumers. The words "production", "supply", "distribution", "storage", "acquisition" or "control of goods or provision of services" all describe activities relatable to the supply side of any market. "Agreement" mentioned in Section 3 refers to any agreement entered into by parties in respect of activities as mentioned above. These activities being quintessentially on the supply side of a market, do not include "agreement" between a producer/service provider on the one hand and the end consumer on the other because no consumer can be said to be involved in activities such as production, distribution or control of any goods or services.

17.6 In the instant case, the service in question is the service of retail home loans. This service is provided by banks and non-banking housing finance companies. It is consumed by the individual borrower. Very clearly therefore, we have to put under our scrutiny any agreement that may have transpired between the suppliers or providers of the service in question for the purpose of Section 3 of the Act.

17.7 For an agreement to exist there has to be an act in the nature of an arrangement, understanding or action in concert including existence of an identifiable practice or decision taken by an association of enterprises or persons. In this case, the allegation by the informant is that the act of charging prepayment interest/penalty is such an act. Furthermore, for an agreement, it is essential to have more than one party. According to the informant's allegation, 4 of the Opposite Parties are such parties entering into the alleged anti competitive agreement. The DG has further expanded the scope of allegation to include 12 more banks.

17.8 An agreement is a conscious and congruous act that has to be associated to a point in time. According to the report of the DG, the reference point for the alleged agreement is a meeting of the Indian Banking Association held on 28.07.2003 which resulted in a communication dt. 10.09.2003 from IBA to its members. In this context, the DG has observed,

The advent of prepayment penalty/charges in India on mass scale is traced to the meetings of banks on 28.07.2003 and 28.08.2003 convened by the IBA with regard to prepayment charges. However, it is noted for LIC Housing Finance that prepayment penalty is mentioned in their loan agreement since 1995. It was deliberated in the meeting of IBA by member banks to have a common approach in fixing prepayment charges on loan. Accordingly, a circular dated 10.09.2003 was issued which specifically spelt out levying of 0.5%-1% prepayment charges as reasonable and the decision in this regard was left to banks to decide. It is noted that for banks augmenting fee based income through prepayment charges was seen as significant consideration in competitive market with pressure on interest spreads. It is noted from the meeting of IBA that the group of banks have come together and taken a collective decision to limit market competition and to generate fee based income.

17.9 Various banks in their replies filed before the DG and later before this Commission have contested the above observation. For instance, HDFC Ltd. in its letter dt. 07.06.2010 stated that it is not a member of IBA at present nor has it been a member for at least the past two decades. Moreover, it did not attend the alleged meeting of IBA and had never received the alleged IBA circular dated 10.09.2003. LIC HOUSING FINANCE LIMITED in its letter dt. 29.01.2010 said that it had been charging prepayment charges since 1995. Similarly, more than one bank has informed that Axis Bank does not charge any prepayment charges/penalty even today. This Commission has not found any material on record in the report of the DG that would negate the averments made by these banks on this issue. In our opinion, from the facts made available to us through the report of the DG it is not possible to pinpoint any specific point in time as the reference point of the alleged agreement. It is useful to examine the content of the aforementioned IBA circular, as reproduced below:

With a view to bring about discipline in a ailment of bank finance to borrowers and to encourage better management of funds, Reserve Bank of India had introduced in 1990 the practice of levying commitment charges on unutilized portion of the working capital limits. Commitment charges were levied at the rate of one percent per annum on the unavailed portion of operating limits. Following withdrawal of mandatory guidelines on credit monitoring by Reserve Bank of India, levy of commitment charges is no longer considered a regulatory prescription.

Reintroduction of levy of commitment charges and adoption of a common approach by banks in this regard came up for discussion in the Managing Committee of the Association in its last meeting. The issue had come up in the context of the practice followed by some of the corporate borrowers who got line of working capital limit approved from banks but met funding requirements through market instruments like CPs, bonds etc. with a fallback option on committed line from banks without any commitment charges.

During discussions some of the members pointed out the international practice was in favour of levying commitment charges. It was pointed out that under proposed Basel-II norms for fixing economic capital, banks would be required to allocate capital in respect of committed lines of credit though not actually disbursed. The need for a common approach in fixing prepayment charges on loans was also stressed by some of the members. On the whole, members were of the view that levy of commitment charges and prepayment charges would help not only in terms of asset - liability management, but also in augmenting fee-based income of the banks. The later was seen as significant consideration in today's competitive market with pressures on interest spread. While members felt that charges in the range of 0.5% to 1% would be reasonable, the view was that a decision in this regard should be left to the banks to decide.

After detailed discussions, the Committee, while, fully appreciating the market dynamics, decided to inform members the above views expressed by the Management Committee so that they could take a decision on levy of commitment charges and prepayment charges.

It is apparent from a plain reading of the contents reproduced above that the meeting of the IBA was actually to discuss the growing practices of corporate borrowers who would avail of committed lines of credit by banks for working capital but would first look at other market options such as CPs, bonds etc. for funding and use line of credit only as a fallback. This put adverse pressure on asset-liability management by banks. It was only in the context of those discussions that some banks raised the issue of prepayment on housing loans also. The discussion on the subject was consequential and not initial. Even then, it merely resulted in a clear decision that it "should be left to the banks to decide." The lack of imperative voice and intent is evident from the language and content of the said circular of IBA. It would be patently unjust to use it as an evidence of either action in concert or process of combined decision making by banks. This rules out any element of contravention of Sub-section (1) of Section 3.

17.10 The word "agreement" for the purposes of the Act has wide connotations as defined under Section 2(b). However, it is imperative that existence of such an "agreement" is unequivocally established. The European Court of Justice has clearly laid down this principle with respect to infringements of Article 81 (1) of the EC Treaty in Cases-204, 205, 211, 213, 217 and 219/00 P, and cases 29 & 30/83, Compagnie Royale Asturienne des Mones SA and Rheinzink GmbH v. Commission wherein that Commission has said that precise and coherent proof must be produced by the party or authority alleging infringement. In this case, the existence of any "agreement" cannot be conjectured or even circumstantially adduced. Mere fact that the IBA issued a circular dated 10.09.2003 mentioning concern of some member banks cannot in itself be said to form a basis for or evidence of an agreement between banks. The DG's report has not produced any precise or coherent proof of any agreement of the nature covered in Section 3.

17.11 The report of the DG observes categorically that there is infringement of Section 3(3)(b) of the Act. It states,

The allegation that the banks are imposing prepayment penalty/charges is found to be true. Further, with regard to allegation for violation of Section 3(3)(a) &(b) made by the information provider violation of Section 3(3)(b) of the Act is found to be true.

17.12 For the violation of Section 3(3)(b), it must be established that there exists an agreement, practice carried on or, decision taken by an any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provisions of services, which result in effects mentioned in Clauses (a) to (d) of Sub-section (3) of Section 3 of the Act. These include acts that limit or control production, supply, markets, technical development, investment or provision of services. The word association has not been defined under the Act or the Companies Act, 1956. Resorting once again to the accepted linguistic meaning of the word, as per concise Oxford Dictionary an association means "a group of people organized for joint purpose". In the instant case, the Indian Banking Association (IBA) can be said to be an association of banks but there is no evidence on record which leads us to conclude that IBA has adopted the practice or taken a decision in the matter. The practice of charging prepayment penalty cannot be said to be a concerted decision of all the Banks/HFCs as all of them have not started charging prepayment penalty at one point of time. HDFC and LICHF are charging prepayment penalty since 1993 and 1995 respectively. The other Banks/HFCs started charging prepayment penalty after many years. It is noted that all HFCs are not members of IBA, which is an association of banks. Even out of the 150 plus member banks of IBA, the investigation covered only 12. There is no evidence on record which suggests that above mentioned Banks/HFCs have formed any internal and discrete association for the purpose of charging prepayment penalty. In the present case as mentioned earlier the above mentioned Banks/HFCs are not charging the same rate of prepayment penalty. Thus congruence of action, which is an integral part of any agreement does not get established by the investigation of the DG.

17.13 In view of the foregoing discussion, the Commission has come to the conclusion that there is no agreement among the banks and HFCs investigated by the DG, for levy of prepayment charges that can be termed as action in concert. Whereas it has been found that some banks / HFCs are imposing prepayment charges there is no evidence to establish that this practice is a result of some action in concert or emerges from a collusive decision. Rather, it is a manifestation of individual, though similar business decisions. Therefore the point No. 2 is decided accordingly.

18 POINT No. 3: Whether there is any agreement of the nature mentioned under Sub-section (3) of Section 3 or existence of any effect of the nature mentioned under Clauses (a) to (d) to Sub-section (3) of Section 3 of the act or some "appreciable adverse effect on competition" in India in the context of Sub-section (3) of Section 19 due to imposing of pre payment charges by some banks?

18.1 As seen above, the fact that some banks / HFCs are imposing prepayment charges is not disputed. It is also seen that this practice by those banks / HFCs is not a result of any agreement. Without prejudice to these findings, we would now examine whether this practice causes effects of the nature mentioned under Clauses (a) to (d) of Sub-section (3) of Section 3 of the Act or causes any "appreciable adverse effect on competition" in India in the context of Sub-section (1) of Section 3 read with Sub-section (3) of Section 19 .

18.2 Some banks, such as Punjab National Bank and State Bank of Hyderabad have argued that for the purpose of invoking Section 3(3) of the Act the practice of charging prepayment penalty should ex facie result in or shall have the probability of resulting in any or all the economic consequences enumerated under Section 3(3) (a) to (d).

18.3 Many of the banks including ICICI Bank Ltd and ALLAHABAD BANK have drawn attention of this Commission to CRISIL research report of March 2009 wherein it is observed that the home loan market had registered a growth of 43% from 2000-01 to 2004-05, that is during and after the period of the IBA circular. Similarly, banks such as Canara Bank and Corporation Bank amongst others have pointed out that in the last decade, there have been a number of banks and HFCs who have joined the home loan business. Punjab & Sind Bank has also stated that there are large numbers of service providers, namely Housing Finance Companies (HFCs) (43), Public Sector Banks(27), Urban Cooperative Banks (53) that are operating the market of home loans.

18.4 There is no material evidence available to disagree with findings of a neutral and reputed research organization, nor has the report of the DG given any facts contrary to the contention of the banks regarding the state of competition in home loan sector or the appreciable growth seen in the last decade. This leads to the conclusion that there is no reason to believe that the practice of charging prepayment charges/penalties has resulted in limiting provision of home loans in the Indian market.

18.5 Looking at the history and growth of the Indian Banks' Association (IBA) we find that it was formed on the 26th September 1946 with 22 members. As on 31st May 2010 IBA has 159 members

Ordinary

117

Associate

42

Total

159

The members comprise

-Public Sector Banks

-Private Sector Banks

-Foreign Banks having offices in India and

-Urban Co-operative Banks.

18.6 In itself these figures represent a very healthy state of growth in the banking sector that shows no indication of any limiting of services provided by them, including that of home loans. Furthermore, the Commission has also studied a report by ICRA available at www.icra.in, which observes that since 2004 the total outstanding of all the banks/HFCs in the housing market has increased from Rs. 12,480 Crores (124.80 billion) in 2004 to Rs. 38,060 crores (380.6 billion) in 2009 with a CAGR of 24.9% from the financial year 2003-2004 to 2008-2009. From this, it is evident that though prepayment charges have been levied by banks/HFCs, it caused no negative impact in the growth of the home loan business.

18.7 Delving deeper into the intent and purpose of Section 3 of the Act, we must now examine whether there is any appreciable adverse effect on competition of the alleged agreement within the framework outlined in Section 19(3). For applicability of Section 19(3)(a), (b) & (c), there should be an agreement of the nature defined under Section 2(b) of the Act, which creates barriers to new entrants in the market or forecloses competition by hindering entry into the market. As discussed above, there is no material evidence to suggest such an effect. In any market, any firm is free to leave the market. In fact, competitors would welcome it. The barrier to entry for competing firms must not be confused with difficulties in exit, if any, faced by the consumers. Therefore, any aspect of any inconvenience or difficulty faced by consumers must be examined in the context of Clause (d) of Sub-section (3) of Section 19.

18.8 Clause (d) of Sub-section (3) of Section 19 makes accrual of benefits to the customers as one of the determinant factors for assessing appreciable adverse effect. If a consumer finds it difficult to shift from one bank to another due to prepayment charges, that difficulty must be examined under this clause. Also, it must be kept in mind that such a movement would only occur when interest rates are falling and other banks are able to offer lower rates to new customers. A customer would like to switch banks only if the interest rates fall enough to outweigh the burden of prepayment charges. It must also be kept in mind that for a fresh loan, a bank is able to raise funds at a lower cost. An older loan would be backed by a higher costing fund on part of the bank. Accrual of benefit to the consumer should not translate to accrual of loss for the bank since eventually it would only drive out banks from the market of home loans or make them drastically reduce the amount of home loans exposure or significantly raise the bar for home loan eligibility. Eventually, it would result in making borrowings for home loans more difficult for consumers. It may also be pertinent to point out that banks do mention a prepayment clause in their agreements, albeit not prominently.

18.9 The DG in his report has given the finding that the practice of charging prepayment penalty does not result in any benefit to consumers and thus factor enumerated in Section 19(3) (d) is present in the practice of charging prepayment charges/penalty.

18.9 In response, several banks have raised the issue of Asset Liability Management to give justification for the practice. DEUTSCHE POST BANK HOME FINANCE LIMITED, LIC HOUSING FINANCE LIMITED and ICICI Bank Ltd amongst others have given detailed reasoning for these charges. These arguments include reasons that may be summarized as below:

-This is done in order to prevent volatility and to meet the increase in capture cost.-It is not penal in nature but is aimed to regulate cost of funds and is within fair practice guidelines of RBI.

-The issue of Asset Liability Mis-matches are genuine commercial realities and the fundamental issue which banks and financial institutions face and therefore necessitate banks to stipulate prepayment charges in order to adequately address such mis-matches. -The applicable prepayment charges and related terms and conditions are informed clearly to the borrowers upfront as required regulatory and as a good commercial and consumer friendly practice.

-The practice of prepayment penalty enhances certainty of cash flow and serves as incentive for investors in securitization instruments. Therefore, as a natural corollary, the said incentive translates into lower rates on the securitized instruments, which in turn results in low cost loanable funds for the banks and financial institutions. The said low cost loanbale funds reduce the interest rates and costs to the home loan borrowers in the relevant market. Thus, the practice of charging prepayment penalty enhances consumer welfare rather than affecting them adversely.

18.10 All the above arguments appear to have reasonable basis in terms of asset-liability management. A bank does not have any independent funds of its own other than those given to it by its depositors or funds that it borrows from other financial institutions. Moreover, for a bank there are two broad sets of consumers: depositors and borrowers. Banks must conduct their affairs to balance the accrual of benefits to both these sets of consumers. This Commission also cannot ignore the factors that may purport to bring benefits to depositors. The DG report has not given any specific findings to counter the efficiency claims or financial justifications submitted by banks. Once the financial justification for charging prepayment charges/penalty is accepted, the question of extent or quantum does not remain an issue pertinent to the state of competition in India.

18.11 There port of the DG itself observes that the imposition of prepayment charges National Housing Bank (NHB) is a business decision and economically reasonable, therefore, not anti-competitive. In our opinion if the explanation of NHB is acceptable as being the business decision then the same principle and explanation is equally applicable to the retail finance by banks. We see no reason to differentiate between the business sense of NHB and other banks in the retail sector.

18.12 The Commission also notes that the borrowers have a lot of choice about the bank from which they would take the home loan, with terms and condition of each are known to them and included in their agreement/contract for taking the loan. Subsequent decisions/choice to opt out of this agreement/contract, and any consequent pre payment charges, need to be viewed in the context of the implications dealt upon in the previous paragraphs.

18.13 The Commission also notes the investigative finding of the report of the DG that concludes that after having tested the practice of charging prepayment penalty on the anvil of 'rule of reason' it found that the practice has reasonable economic justification and hence the practice is not violative of Section 3(1) of the Act.

19 POINT No. 4: Is there any evidence of dominance or its abuse in terms of Section 4 of the Act by any of the banks / HFCs investigated by the DG?

19.1 The DG's report has also rejected the allegation of market dominance and abuse thereof by the banks and financial institutions and found that banks and financial institutions and IBA have not violated Sections 4(1), (2)(a)(b) of the Act.

19.2 In respect of the observations relating to applicability of Section 4 and in view of para 1.7 supra, we observe that none of the Banks/HFCs investigated can be said to be capable of "operating independently of competitive forces" and/or "affecting its competitors or consumers or the relevant market in its favour" by the sheer fact that no bank/HFC has more than 17% market share. Market share of the enterprise is one of the most decisive aspects for determining dominant position. In the instant case, market concentration is fairly dilute. Applying the factors or determinants given in Sub-section (4) of Section 19 of the Act, we find there are no facts that point toward dominant position of any of the banks / HFCs investigated. Size and resources of SBI, ICICI, HDFC, Citibank, etc. are quite comparable as also their economic power. There is no vertical integration of banks. There is also no obvious entry barrier for newer banks / HFCs to enter the home loan market.

19.3 Therefore, the Commission agrees with the Director General that none of the banks or HFCs investigated individually have any dominant position in the market of retail home loans. Hence provisions of Section 4 of the Act are not attracted to the facts of the present case.

19.4 In our opinion, nothing in Section 19 can survive in face of a categorical finding of investigation that there is no violation of Sections 3(1) or 4(1) of the Act.

ISSUE No. 5: Does the fact that a borrower has to bear a cost for switching to another bank, or exiting altogether by paying balance amount due, by itself can be said to limit the competition in home loan market as it can be said to limit his/her choice in terms of changing the service provider or to exit altogether?

20.1 For understanding and determining this issue, the entire process of availing home loan by a borrower, and his/her subsequent decisions/choice to prepay the entire amount may be divided into two parts, namely (a) Choice in the original selection of the bank/HFC for availing of the loan and entering into a contractual agreement with it, and (b) Choice in the decision to exit.

20.2 As far as the (a) is concerned, it has been established beyond any doubt that the home loan market is a vibrant, growing, competitive market. The borrower has a wide choice of banks/HFCs, as also in the variety of products available to him. Price is only one of the elements of the totality of factors he/she would consider while exercising a free competitive choice in this market. This is obvious from the very fact that though Axis Bank does not levy PPC, it is not amongst the more significant and bigger lenders of home loans. There could be several non-price competitive factors in selecting bank/HFC, as mentioned in the earlier part of this order.

20.3 Once the borrower has made the choice fully, he/she enters into a contractual agreement with the selected bank/HFC. Provisions in regard to PPC, if any, are part of this agreement. This agreement so entered into is entirely voluntary, with full knowledge of all the provisions, and cannot be in any way confused with an agreement entered into without choice due to abuse of dominance by a provider of goods/services attracting the provisions of Section 4 of the Act.

20.4 Coming to the decision to exit mentioned in para (b) above, the borrower is free to exit subject to paying the PPC. Thus the exit is not prohibited, and only has a cost attached to it. The reasons and justification given for this cost have been covered earlier, including being on account of cost incurred due to loss of interest, holding cost of money till it is redeployed, possibility of fresh deployment being at a lower interest rate (since switching typically is resorted to by borrowers in a falling interest rate regime) etc. This part of the transaction has, therefore, to be seen in terms of the Indian Contract Act, 1872, since the costs/prices to be charged in a competitive market are determined by the market and is not an issue to be determined by a competition regulator. This would become a competition issue only if this is sought to be manipulated through anti-competitive agreement(s) or abuse of dominance. It is, therefore, necessary to take up a harmonious construction of Competition Act, 2002 and Indian Contract Act, 1872.

20.5 Section 62 of Competition Act, 2002 reads as follows:

The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

20.6 In the Indian Contract Act, 1872 Sections 73 and 74 are relevant in this context, extracts from which read as follows:

Section 73: Compensation for Loss or Damage caused by breach of Contract.

When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Section 74: Compensation for breach of contract where penalty stipulated for:

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

20.7 It is, therefore, clear that in regard to this issue the provisions of the Contract Act are attracted which clearly provide that in case of breach of a contract, the party which wants to exit has to pay for consequential loss/damage to the other party. Indeed, if this were not the case, wherever in any competitive market the price of a product comes down all the long-term contract buyers would like to break the contract, and if the product prices went up all the suppliers/sellers would like to exit. This kind of situation could create huge uncertainties in any product market, with inevitable negative macro-economic impact.

20.8 In the present instance, based on the data and analysis in earlier part of the order, it is clear that PP Cs cannot be seen to be anti-competitive in terms of Issue No. 5. The question as to whether the quantum of PPC charged, with wide variations between different banks/HFCs, is fair or not would be determined by the market or by other appropriate fora.

20.9 As regards the citations of judicial pronouncements relied upon by the DG, it is felt that the facts of the case in TT Ltd. v. Industrial Finance Corporation India Ltd. (Hon'ble High Court of Delhi) , Hotel Vrinda Prakash v. Karnataka State Financial Corporation, ( Hon'ble Karnataka High Court) and State Bank of India v. Dr. (Mrs.) Usha Vaid (Hon'ble Supreme Court of India) do not support any findings of the DG.

20.10 In the above said first two cases the respective Hon'ble High Courts of Karnataka and Delhi have given judgment in favour of levying prepayment penalty by the financial institutions. Whereas, on perusal of Hon'ble Supreme Court order dated 19.09.2008 in the said case it is found that the Hon'ble Court has left the question of law open to be decided in an appropriate case and have dismissed the particular Special Leave Petition (SLP) finding no ground to interfere in the matter. Therefore, it cannot be held that the Hon'ble Supreme Court is not in the favor charging of prepayment penalty.

Decision

21.1 This is a multi-dimensional case involving macro-economic as well as consumer issues. We have, therefore, identified and determined the issues in this case very carefully within the four walls and boundaries laid down by the Act. It is evident from our analysis and determination of these issues earlier in the order that there is a vibrant market in provision of home loans, with the number of service providers and the variety in products growing consistently and continuously over a period of years. There is no bank/HFC in the market which can be deemed to be dominant by any of the parameters used for determining dominance. The question of abuse of dominance, therefore, does not arise. It is equally clear that there is no agreement amongst the various service providers i.e. the banks/HFCs, nor is there any uniform practice being followed by them. They are operating as competitors in a vibrant competitive market. Neither the violation of Section 3 or Section 4 of the Act has been established, nor is there any evidence whatsoever of an appreciable adverse effect on competition in the home loan market in India in this context.

21.2 In view of the discussion above, this Commission does not find any contravention of Section 3 or Section 4 of the Act. Accordingly, the proceedings are hereby closed.

21.3 Secretary is directed to inform the parties accordingly.

P.N. Parashar, Member (Dissenting)

Shri Neeraj Malhotra, Advocate ('the Informant'), has filed the present information under Section 19 of the Competition Act, 2002 ('the Act') to advocate and espouse the cause of the consumers who avail home loans and are required to pay pre-payment penalty ('PPP/ pre-payment charges') on foreclosure of such loans.

As the facts have been set out in detail in the majority order, I therefore do not wish to burden this order by reproducing the same again. However, I will refer to some significant aspects and facts which have a crucial bearing upon the issues dealt with in this order. Since the replies of the opposite parties to the findings of the DG have also been noted in detail in the majority order, I would therefore refrain from restating the same and a brief account thereof will be given at the appropriate stages.

Facts

The informant has filed the instant information alleging, inter alia, that the practice of levying PPP on the pre-payment of home loans by the following banks and Housing Finance Companies ('the HF Cs') is in contravention of the provisions of Sections 3 and 4 of the Act.

(i) Deutsche Post Bank Home Finance Limited,

(ii) Housing Development & Finance Corporation Limited,

(iii) HDFC Bank Limited and

(iv) LIC Housing Finance Limited.

The informant has further alleged that the acts/practices carried on and the decisions taken by the opposite parties are violative of provisions of the Section 3(1), 3(3)(a) and 3(3)(b) read with Section 4(1), 4(2)(a)(i) of the Act. The informant has prayed, inter alia, that after conducting an enquiry into the matter, the enterprises committing contravention of these provisions be penalized and be directed to discontinue with the decisions and practices adopted by them in this regard.

The gravamen of the information is that the opposite parties are banks and HF Cs which are offering home loans to the general public and have, jointly and severally, agreed upon recovering foreclosure charges as PPP ranging from 1% to 4% on the loan amount. It has been alleged that the above mentioned PPP is being charged if the borrowers choose to close their loan accounts by pre-paying the loan amount. It is further alleged that the opposite parties have been charging PPP on the entire loan amount and not merely on the outstanding loan amount, which indirectly determines the sale price of the services. According to the informant, the same also limits the supply/provisions of services thereby causing an appreciable adverse effect on competition within India. As per the Informant, the opposite parties are also abusing their dominant position in the relevant market by imposing unfair and discriminatory conditions on the purchase of services thereby preventing their borrowers from switching over to other banks / HF Cs offering similar services at cheaper rates which is an anti-competitive practice.

The Commission, on examining the matter, took a view that there exists a prima facie case and passed an order dated 10.09.2009 under Section 26(1) of the Act whereby the Director General (DG) was directed to make an investigation into the matter.

The DG submitted his report dated 16.12.2009 to the Commission by concluding that the opposite parties along with the following banks have contravened the provisions of Section 3(3)(b) of the Act.

(i) Allahabad Bank;

(ii) Canara Bank;

(iii) Corporation Bank;

(iv) ICICI Bank Ltd.;

(v) Indian Bank Ltd.;

(vi) Indian Overseas Bank;

(vii) Oriental Bank of Commerce;

(viii) Punjab & Sind Bank;

(ix) Punjab National Bank;

(x) State Bank of Hyderabad;

(xi) State Bank of India; and

(xii) Vijaya Bank

It is clarified that the informant had filed information against only four banks/enterprises but the DG added twelve more enterprises as opposite parties. Out of these sixteen opposite parties, HDFC Corporation Ltd. and HDFC bank Ltd have filed common replies. Hence, effectively there remained fifteen opposite parties. The Commission during the course of enquiry issued notice to IBA which has also filed a detailed reply as an opposite party. Therefore, if all such opposite parties are counted there are a total of seventeen opposite parties in the present matter. All the above referred opposite parties were asked to file written objections/replies against the DG report. These parties have filed detailed written submissions before the Commission which are on record. They have also been heard at length. The Commission during the course of enquiry also sought clarifications from these parties on some points. It may be pointed out that a copy of the DG report was sent to the informant also and a notice was issued to him to file his submissions/comments etc., but he neither appeared on the date fixed for the hearing i.e. 15.11.2010, nor did he prefer to file any submissions before the Commission. The present matter is, therefore, being disposed of on the basis of the entire material available on record.

I have had the advantage of reading the draft erudite order prepared by my learned brethren. The majority is of the opinion that there exists no contravention of the Act as alleged by the Informant. I am in agreement with the majority opinion on their findings on non-contravention of the provisions of Section 4 of the Act. However, with respect, I find myself not able to agree with the majority view on the remaining findings for the reasons to be stated in this order.

Consumer Interests and Competition Law

At the outset, I deem it necessary to discuss the co-relationship between the consumers' interests and the competition law.

The modern competition law usually seeks to protect the process of free market competition in order to ensure efficient allocation of economic resources. It is commonly believed that competition law is ultimately concerned with the protection of the interest of the consumers. Conversely, it may be said that consumers' detriment is generally presumed to be present when the competitive process is thwarted or damaged.

Consumer is considered to be King in a free market and the sellers are supposed to be guided by the will of a consumer in such markets. There is a constant need for harmonizing the protection of consumer rights with promoting free markets. In Awaz v. Reserve Bank of India and DCM Financial Services Ltd. v. Mukesh Rajput 2008 Bus L R764 (NCDRC), the National Consumer Disputes Redressal Commission, while deciding the issue of interest on credit taken on the basis of credit cards, in its joint order disposing both cases observed:

[E]ven in any free economy/deregulated economy exploitation of the borrower/debtor is prohibited and is considered to be unfair trade practice. Free economy would not mean licence to exploit the borrowers/debtors by taking advantage of their basic needs for their livelihood. This cannot be permitted in any civilized society maybe a deregulated free market economy.

Hence, in the context of general consumer welfare the role of competition authorities while enforcing competition law is to be properly understood. This role of competition authorities has been highlighted by K. J. Cseres in his article 'The Controversies of the Consumer Welfare Standard' (Vol. 3 Issue 2 pp 121-173, March 2007) I consider it appropriate to quote the following extracts from the said article:

Competition authorities all around the world are becoming more conscious of the impact that competition policy and law enforcement has on consumers. They seem to be ever more anxious to declare and demonstrate the significant role they play as enforcers of competition law in consumers' economic life. The European Commission is no exception. The European Commission emphasizes that anti-competitive practices raised the price of goods and services, reduce supply and hamper innovation, which in turn increase the input cost for European businesses and as a result, consumers end up paying more for less quality (European Commission, Annual Report, 2005, P 7).

....

In the footsteps of former EC Commissioner Mario Monti, Neelie Droes formulated the competition policy message of her cabinet as the following, 'Our aim is simple to protect competition in the market as a means of enhancing consumer welfare and ensuring an efficient allocation of resources.' (European Commissioner for competition speech at the European Consumer and Competition Day, London 15 September 2005). Director General of DG Competition, Philip Lowe emphasized that, 'competition is not an end in itself, but an instrument designed to achieve a certain public interest objective, consumer welfare.

....

The European policy makers finally synchronize with other enforcement agencies around the world. In the United States antitrust enforcement has a much longer tradition. Besides the Antitrust Division of the Department of Justice, 'the FTC acts to ensure that markets operate efficiently to benefit consumers.' In the United Kingdom the Office of Fair Trading's Statement of purpose declares, 'The OFT's goal is to make markets work well for consumers'. These and similar statements imply that competition policy works towards the improvement of consumer interests. Who are the consumers and which are the interests consumer welfare as the goal of competition policy refers to?

It may also be noted that the Competition Act of Republic of South Africa provides for an efficient, competitive economic environment, balancing the interests of workers, owners and consumers and is focused on development that will help its citizens. Further, it strives for markets in which consumers have access to, and can freely select the quality and variety of goods and services they desire. Similar objectives are to be found in the competition laws of other jurisdictions as well.

In India, the competition legislation has been enacted to provide, keeping in view the economic development of the country for the establishment of a commission to (a) prevent practices having adverse effect on competition; (b) to promote and sustain competition in market; (c) to protect the interests of consumers; and (d) to ensure freedom of trade carried on by other participants in markets, in India.

These objectives are further reflected in the various provisions of the Act and, in particular, under Section 18 of the Act as per which the Commission is enjoined upon, inter alia, to protect the interests of consumers and ensure freedom of trade carried on by other participants in the markets. Further, from the provisions contained in Section 19(3) of the Act, it is manifest that accrual of benefits to consumers is to be taken into consideration by the Commission while determining whether an agreement has an appreciable adverse effect on competition or not.

Recently, the Hon'ble Supreme Court of India in the case of Competition Commission of India v. Steel Authority of India Ltd., Civil Appeal No. 7779 of 2010 vide its decision dated 09.09.2010 observed as under:

[T]he principle objects of the Act, in terms of its Preamble and Statement of Objects and Reasons, are to eliminate practices having adverse effects on the competition, to promote and sustain competition in the market, to protect the interest of the consumers and ensure freedom of trade carried on by the participants in the market, in view of the economic developments of the country. In other words, the Act requires not only protection of trade but also protection of consumer interest.

Thus it can be noticed that protection of consumers' interest has engaged the parliamentary attention while enacting the Competition Act and the same has also been reiterated by the Hon'ble Supreme Court. Therefore, the function of the Competition Commission of India is not only to supervise and sustain competition in the market but also to protect the interests of the consumers. The Commission has been vested with wide authority and discretion to deal with the information as can be noticed from the following observations of the Hon'ble Supreme Court in the Steel Authority's case (supra):

Under the scheme of the Act, this Commission is vested with inquisitorial, investigative, regulatory, adjudicatory and to a limited extent even advisory jurisdiction. Vast powers have been given to the Commission to deal with the complaints or information leading to invocation of the provisions of Sections 3 and 4 read with Section 19 of the Act.

I may also refer to the budget speech delivered by the Hon'ble Finance Minister for 2009-2010:

The government has established competition commission of India, an autonomous regulatory body to promote and sustain competition and market, protect interests of consumers and to prevent practices having adverse effect on competition....

...The benefits of competition should now come to more sectors and their users and consumers. Now is the time for us to work on these aspects to eliminate supply bottle necks, enhance productivity, reduce costs and improve quality of goods and services supplies to consumers.

Thus, the Commission has to exercise its powers keeping in view the legislative intent as reflected in the provisions of the Act and as explained by the Hon'ble Supreme Court.

Before adverting to the issues involved and the contentions urged, it would be useful to set out in brief the concept of practice of levying PPP by Banks/HF Cs.

Pre-payment charges/ PPP is an amount which a bank or retail home loan institution charges a borrower when such borrower returns the money borrowed/advanced before the stipulated tenure of the loan. Resultantly, a customer may migrate to a lower-cost source of funds or return the loan before the due date only if he pays an additional sum as calculated by the banks. This, on the face of it, creates an exit load on borrowers.

In the setting of the above conceptual background and after going through the entire relevant material and on considering the written as well as oral submissions of the parties, I, now proceed to formulate the points which need to be determined for adjudicating this matter.

Points for Determination

In light of the foregoing, the following points arise for determination in the instant matter:

(i) Whether the present information is maintainable as the PPP is charged pursuant to the allegedly valid contract entered into by and between the parties?

(ii) Whether the provisions of Section 3(1) of the Act are attracted in this case?

(iii) Whether the opposite parties have contravened the provisions of Section 3(3)(a) of the Act? If so, its effect?

(iv) Whether the opposite parties have contravened the provisions of Section 3(3)(b) of the Act? If so, its effect?

(v) What order(s), if any, may be passed under the Act?

Point No. (i)

Whether the present information is maintainable as the PPP is charged pursuant to the allegedly valid contract entered into by and between the parties?

Before I advert to the main issues, I may note that the argument of having knowledge about levy of PPP at the time of entering into the contract with the bank and the same being incorporated as one of the terms and conditions and hence the levy of PPP cannot be impugned, is misconceived. As noted above, Section 3(1) of the Act prohibits any agreement with respect to production, supply, distribution, storage, acquisition, or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition within India. Further, Section 3(2) of the Act provides that any agreement in contravention of this provision shall be void. Thus, a clause in the agreement charging a PPP being contrary to law can always be assailed by the aggrieved person and he cannot be estopped from attacking the same as it is well settled that there can be no estoppel against the law. Even otherwise, an interpretation to the contrary, would render the entire competition law redundant, otiose and nugatory.

It is pertinent to mention here the following observations of the Hon'ble Supreme Court in the case of Central Bank of India v. Ravindra (2001) 107 Comp Case 416 (SC):

...Banking is an organised institution and most of the banks press into service long-running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by the best of legal brains. Borrowers other than those belonging to the corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous.... Statements of accounts supplied by banks to borrowers many a time do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and wits of the borrowers.

In view of the above, I am unable to accept the contentions raised by some of the opposite parties on this point. It may be noted that today consumers enter into various types of standard forms of contracts which contain unilateral or one sided terms and conditions and consumers have no real choice in signing such contracts. Thus, if it were to be held that the consumers knowingly entered into such contracts and therefore, they are disabled from challenging the terms by invoking the provisions relating to anti-competitive agreements, then, such an interpretation would sound a death knell to the entire competition regulatory law.

The opposite parties have also contended that PPP is protected under the provisions of Sections 73 and 74 of the Indian Contract Act, 1872, which enable the aggrieved party to claim damages to cover the losses suffered in the event of breach of contract. It is contended that the loan agreement has been duly signed by the customers and PPP being a part thereof, the customers cannot resile therefrom. From the scheme of the Act, it is apparent that once an agreement has been determined as causing or likely to cause an appreciable adverse effect on competition, such an agreement, being void, cannot be enforced by the parties in a court of law. It may also be pointed out that even the jurisdiction of civil courts is barred in relation to the issues covered within the jurisdiction of the Commission under the Act as per the provisions contained in Section 61 of the Act.

Moreover, by virtue of the provisions contained in Section 60 of the Act, the provisions of the Act have an overriding effect in the event of any inconsistency with any other law for the time being in force. Thus, the provisions contained in Sections 3(1) and 3(2) of the Act have to be given full effect and if any agreement is found to be in contravention thereof, the same needs to be declared void. Moreover, it may also be noticed that the provisions of the Act are in addition to and not in derogation of, the provisions of any other law for the time being in force by virtue of Section 62 of the Act.

A combined reading of the provisions of Sections 60, 61 and 62 of the Act, in the context of other provisions of the Act, particularly Section 3(2) of the Act, therefore, will remove all doubts about the jurisdiction of the Commission in relation to anti-competitive agreements which have to be examined within the perspective of the Act.

In view of the above discussion, I am of the opinion that the plea raised by the opposite parties regarding lack of jurisdiction of the Commission to entertain the information is baseless and is hereby rejected. Point No. (i) is, therefore, decided accordingly.

Point Nos. (ii), (iii) and (iv)

Whether the provisions of Section 3(1) of the Act are attracted in this case; Whether the opposite parties have contravened the provisions of Section 3(3)(a) of the Act; and Whether the opposite parties have contravened the provisions of Section 3(3)(b) of the Act.

Before I deal with these points on merits, I deem it proper to narrate the factual background of the alleged common approach/practice adopted by the opposite parties. The narration and analysis of these facts is essential for proper adjudication of the common aspects involved in these points.

The DG has noted that this practice was started by HF Cs in and around the year 1993. The available evidence suggests that, perhaps, for the first time such a levy was made by HDFC Ltd. The following extracts from a circular dated 12.09.1994 of HDFC Ltd. throw some light on existence of this practice in the financial year 1993-94:

HDFC Ltd. in financial year 1993-94, collected Rs. 3.20 crores as early redemption charges on pre-payment of an amount of Rs. 154 crores i.e. 2% of the amount prepaid.

(Para 3 of internal circular dated 12.09.1994 of HDFC Ltd.)

Loan to non-residents' being short term loans give HDFC higher yields. There is also an element of risk in the event of the individual returning to India earlier than scheduled. It has, therefore, been decided not to levy any early redemption charges for loans to non-residents Indians....

(Para 7 of internal circular dated 12.09.1994 of HDFC Ltd.)

From the above, it can be seen that it was decided not to levy any PPP in case of non-residents, as it may result in a loss to the banks if the Non-Resident Indian returns to India before the scheduled date and the rate of interest goes down.

It is further noted that the LIC Housing Finance Ltd., is following the practice since the year 1995. In the case of HF Cs this kind of levy was started by the then existing dominant players in the market after the entry of newer and more aggressive home loan companies. Thus, it appears that the first one to levy a PPP was HDFC Ltd., around 1993, followed by LIC Housing Finance Ltd. in 1995. It is understood that at the time of formation of LIC Housing Finance Ltd., the only worthwhile competitor was HDFC Ltd. Subsequently, the LIC Housing Finance Ltd. felt the heat of competition from later entrants such as ICICI Ltd., etc. Thus, as the initial trend shows the main objective of the imposition of PPP was to deter competition and to prevent the flight of loan accounts from the existing HF Cs/banks to the other entrants offering similar services at a lower cost and to earn more profit in the housing finance sector. It is also seen that the State Bank of Hyderabad started levying a PPP on floating rate loans from June, 2001 and on both types of loans from August, 2004. However, the practice of charging the PPP was not as widespread till 2003 as it is today.

Meetings of Indian Banks' Association and Circulars issued by it

(Concerted Approach)

In the year 2003, the Indian Banks' Association (IBA) conducted meetings on banking issues related to commitment charges and pre-payment charges. It is crucial to notice that the managing committee of the IBA discussed and deliberated the need for a common approach in fixing pre-payment charges on loans in its meeting held on 28.08.2003. It would be evident from the minutes of the IBA meeting that the matter was discussed as an avenue for earnings and it would be appropriate to quote from the said minutes which are as under:

...[W]hile discussing the issue members had expressed divergent views on the subject. While one view was that commitment charges on non-availment of committed line of credit would improve the fee-based income of banks. Suggestions were made that we should also think of uniform norms for pre-payment charges when a borrower chooses to pre-pay the loan availed. With the interest spread narrowing under intense market competition, it was felt that banks should look for other avenues for earnings. It was therefore suggested that IBA could suggest to reintroduce commitment charges on unutilized portion of working capital limits and decide on levy of pre-payment charges with the decision as to the extent of charges to be levied being left to the banks....

The meeting of 28.08.2003 of the IBA resulted in a communication dated 10.09.2003 from IBA to its members, the extracts thereof are quoted below:

On the whole, members were of the view that levy of commitment charges and pre-payment charges would help not only in terms of assetliability management, but also in augmenting fee based income of the banks. The latter was seen as significant consideration in today's competitive market with pressures on interest spread. While members felt that charges in the range of .5%-1% would be reasonable, the view was that a decision in this regard should be left to the banks to decide....

Thus, it can be seen that the member banks of IBA in the meeting have deliberated and discussed the issue of levy of PPP and collectively agreed to have unity and unanimity in having a common approach in fixing a PPP on loans. It is evident that the group of banks had come together and took a common decision to limit market competition and to generate fee based income. These minutes clearly reflect and convey the intention, the motive and the objective for taking the decision for adopting uniform norms for pre-payment charges.

Moreover, it would be useful to refer to and quote the reply submitted by the IBA dated 9.11.2009 to the notice issued by the DG as under:

...When the issue was again taken up at eh ext meeting held on 28.08.2009, some of the members pointed out that the international practice was in favor of levying commitment charges. It was also pointed out that under the proposed Basel II norms on fixing economic capital, banks would be required to allocate capital in respect of committed lines of credit through not actually disbursed. At the meeting the need for a common approach in fixing pre-payment charges on loans was also suggested by some of the members. After detailed discussions, the committee, while fully appreciating the market dynamics decided that a suitable communication be sent to member banks bringing out the view points expressed by the members so that the member banks could take a decision on levy of commitment charges and pre-payment charges....

From this letter, the motive, objective and the desire of the banks in taking the common decision on the subject stands fully verified and confirmed.

Further, from the material available on record on the file of DG including the circular letters issued by the opposite parties, as noted below, it is clear that the banks/HF Cs, pursuant to the aforesaid circular of the IBA, Dated 10.09.2003 adopted/changed their policies and levied PPP accordingly which goes on to show the concerted and collaborated action by the opposite parties in executing the decision taken in the meeting dated 28.08.2003.

(i) LIC Housing Finance Ltd.

It may be noted that LIC Housing Finance Ltd., one of the opposite parties, pursuant to and in furtherance of the aforesaid circular of the IBA dated 10.03.2003 issued a letter, within a few days thereafter, i.e. on 15.09.2003 to all regional managers/area managers, officers-in charge of extension counters conveying its decision to charge 2% PPP for all schemes except for Griha Shobha Scheme. The relevant portion of this letter is extracted below:

Pre-payment Levy Charges

When the loan is prepaid either in part or in full, we now charge 1.5% Levy Charges for all the schemes except for Griha Shobha, Griha Vikas and Apna Office Schemes.

Taking into account the revision of interest rates, increasing overheads and also to arrest increasing turnover of closures it has been decided to charge 2% pre-payment levy charges for all our schemes except for Griha Shobha Scheme.

(ii) Punjab National Bank

Similarly Punjab National Bank also pursuant to the letter dated 10.09.2003 of IBA issued a letter dated 10.03.2004 to all offices on the issue of, inter alia, prepayment charges to the following effect:

Pre-payment Charges

In order to dissuade the borrowers from shifting to other banks, it has been decided to introduce levy of pre-payment charges @2% on the outstanding, pre-paid in loans. These charges will be applicable on all Term Loans to be sanctioned on or after 01.04.2004. Such charges will be applicable only in respect of the borrowers who shift to other banks by pre-paying the loans. In case the loans are pre-paid by the borrowers from their own sources, the same may not be levied. Further, Z Ms may relax/waive these charges, to the full extent, on merits of each case.

The above amendments would be effective from 01.04.2004. Other guidelines on the subject will remain unchanged.

(iii) Indian Bank

Indian Bank vide its letter dated 20.08.2005 communicated to the officers as under:

It is observed that in a few accounts Term Loans are pre paid by borrowers with funds from various sources including shifting of the accounts to other banks.

We have not been so far stipulating pre payment penalty from the customers at the time of pre payment of the contracted loan as a general condition. In existing sanctions, in many cases, such a condition is not there.

We have examined the issues involved in this regard with a view to recovery of pre-payment charges even without any such specific condition being stipulated unless other specifically agreed not to levy prepayment penalty at the time of sanction.

Based on the opinion received from HO: Legal Department it has been decided that:

In respect of all existing Term Loans, whenever pre payment is resorted, to issue a letter on the lines suggested below to the borrowers.

as per Term Loan agreement the customer is to repay in monthly/quarterly installments Rs. .over a period of...months whereas now the customer has requested to prepay the entire outstanding in one lumpsum contrary to the agreed arrangements. In view of the breach, the Bank is stipulating that pre-payment charges of....% be paid so that bank can accept such pre-payment and release the securities held against the said term loan.

In all further sanctions, pre-payment charges at 2% of outstanding balance/Drawing limit of the Term loan, is to be stipulated as a sanction condition, unless specifically waived by the sanctioning authority. You are requested to arrange to comply with the above direction and inform the branches under your control accordingly.

(iv) Indian Overseas Bank

Indian Overseas Bank vide its circular dated 11.02.2004 issued to all its branches/regional offices in India conveyed as under:

1.1 As per Risk Management Guidelines, one of the important risks that banks are advised to identify, measure and manage is liquidity risk. The management of liquidity risk depends on efficient asset-liability management.

1.2 In order to inculcate a sense of discipline among the borrowers in availment of bank finance, and to encourage better management of funds the members of the Managing Committee of IBA, were of the view that levy of commitment charges and pre-payment charges would help not only in terms of asset-liability management but also in augmenting fee based income of the banks.

1.3 The matter was reviewed in the context of the above and it has been decided to levy pre-payment charges on loans with maturity of more than one year. The operational instructions in this regard are enumerated below.

2.0 Operational Instructions:

2.1 Branches are advised to levy-a pre-payment charge of 1% on the prepaid amount in case of term loans & other loans (irrespective of residual period of loan) where the repayment of the loan exceeds one year.

2.2 While sanctioning these loans, borrowers have to be put on notice that they are liable for pre-payment/foreclosure charges. This notice should form an integral part of the sanction letter as one of the terms and conditions (of sanction).

(v) Deutsche Postbank Home Finance Ltd.

Deutsche Postbank Home Finance Ltd vide its circular dated 28.09.2005 decided to revise pre-payment charges as under:

Circular ref no: Ops/ROI & FEES/007/05-06 Date: 28.09.2005

Subject: Modification in Prepayment charges policy

In order to make our product more competitive and in harmony with the market practice, the management has decided to modify the existing policy on prepayment charges in respect of loans under both fixed and variable interest rate category.

The modified pre-payment charge (both Fixed & variable interest rate category) is explained as below:

Type of Pre-payment

%age rate on the amount pre-paid

Part Pre-payment

No prepayment charges to be levied

Full Pre-payment

2% on the amount prepaid on the date of pre-closure plus all amounts of prepayment made during the last one year from the date of final prepayment/pre-closure.

The modification will only be applicable for newly logged in cases after implementation of Finn one.

(vi) State Bank of India

State Bank of India reviewing its policy on pre-payment charges vide its circular dated 13.04.2004 communicated to its branches /offices as follows:

ii. The bank shall recover a pre-payment charge at the rate of 2% of the pre-paid amount for both floating interest rates term loans and fixed interest rate term loans.

iii. No pre-payment charge will be applicable up to pre-payment of Rs. 10 lacs except in cases where the loan is prepaid for reasons of take over by another bank/financial institution (the cap has been reduced from Rs. 50 lacs to Rs. 10 lacs with the objective to exclude only small borrowers in AGL, SIB and C&I segments).

It is also useful to quote the SBI circular dated 09.04.2001 of the bank which is as under:

As you are aware, presently there is no policy in the Bank to recover a charge for premature closure of term loans. The matter was reviewed and it has been decided as under:

• Henceforth, all term loans with floating interest rates, to carry a covenant to the effect that the Bank will be entitled to recover a charge on pre-payments, up to a maximum extent of 1% on the pre-paid amount, for the residual period.

• The actual levy to be decided with the approval of the concerned Group Executive who may consult DMD & CFO in the matter.

• Pre-payments up to Rs. 5 crores to be exempted from the levy.

Please advise the branches accordingly.

(vii) Corporation Bank

Corporation Bank vide its circular dated 02.09.2004 on 'Corp Home Loan Scheme-Revision of Fixed Rate of Interest' noted, inter alia, as under:

3.4 For Pre-payment penalty, the extant guidelines under Corp Home Scheme are as under:

Category of Loan Pre-payment

Penalty Applicable

Floating Rate Loans

No PPP

Fixed Rate Loans

i) Pre-payments after completion of 5 years from the date of availing the loan ii) Pre-payments before completion of 5 years from the date of availing the loan

No penalty

a) Pre-payment amount not exceeding 10 EMIs/ 2 quarterly / one

No Penalty

Note: The borrower has the option to prepay the loan after a period of 5 years without any pre-payment charges, in case the borrower is not agreeable for the rate of interest refixed by the bank at the end of 5th year.

(viii) ICICI Bank

ICICI Bank vide its circular dated 13.06.2005 revised pre-payment charges as under:

Charges

Full & Final Pre-payment Fee for all products- 2%+applicable Service Tax & Surcharge @ 10.2%.

Pre-payment Documentation Charges (Applicable for cases where the First Disbursement has happened on or after December 1, 2004)- Rs. 500/- + Service Tax & Surcharge @ 10.2%.

(ix) Vijaya Bank

Vijaya Bank vide its reply dated 06.11.2009 to the notice issued by the DG submitted as follows:

The bank has introduced pre-payment, pre-closure charges in line with the system prevalent in the banking industry. The chief reason for levying pre-payment charges is to protect the bank from interest rate risk and Asset Liability Mismatch. Presently, interest rates/other charges offered by our Bank are competitive in comparison to other banks. However, a number of requests are coming for reduction in interest rates, mainly due to threat of take over by other banks. Instances have also come across of unethical practices of getting letters from some other banks and bargaining with our Bank for interest reduction. The letters in many of such cases are only in-principle interest shown by the banks and not a final decision after credit sanction. This in turn was leading to asset flight and impacted respective loan books. The pre-payment charges were intended to make exists expensive. This effectively meant that the charges could be as high as two percent of the outstanding as on date. Therefore, it was decided that wherever interest on term loan is refixed at a lower rate, a condition shall be stipulated in the sanction communication that in case of pre-closure of the loan the borrower shall be liable to pay 2% on the outstanding as on date or ½ % per year for the remaining tenure of the loan, whichever is lower. All these terms are indicated in the sanction communication to the borrower in advance. Further, our bank does not levy pre-closure charges in case of term loans where the closure is out of owned funds of the borrower. In case of education loan we have provided total waiver of pre-payment/pre-closure charges in order to encourage the students to pre-pay/pre-close their Education Loans, whenever they have surplus funds.

Thus, in the above context, the contents of the circular dated 24.02.2005 of the bank may be noted:

The bank has introduced pre-payment, pre-closure charges to fall in line with the system prevalent in the banking industry. Presently, interest Rates/other charges offered by our bank are competitive in comparison to other banks. This has been offered to support our field functionaries for credit retention/expansion.

....

In this regard, our Chairman & Managing Director, while according sanction for a reduction of interest as a special case in one of the borrower accounts, directed that-

'Whenever we agree for a reduction in interest, a condition should be additionally stipulated as to pre-closure charges at 2% on the outstanding as on date or ½ % per year for the remaining tenure of the loan whichever is lower.

(x) Canara Bank

Canara Bank vide its circular dated 15.10.2003 noted as follows:

Imposition of Pre-payment Penalty

In our Bank, presently, no pre-payment penalty is being levied in respect of takeover of loan accounts by other banks/HF Is.

With a view to prevent migration of borrowal accounts from our Bank to other banks/HF Is, it has been decided to impose a pre-payment penalty of 2% on the outstanding liability wherever requests for transfer of housing loan accounts to other banks/HF Is are received w.e.f. 01.11.2003.

However, for pre-closure of loan by the borrower which do not involve transfer of accounts to other banks/HF Is, no penalty need be levied.

Further, it may be noted from the Manual of Instructions issued by the bank that PPP was imposed to prevent migration of borrowal accounts as is reflected from Clause 2.20 and the same is quoted below:

To prevent migration of borrowal accounts from our Bank to other banks/HF Is, a pre-payment penalty of 2% on the outstanding liability wherever requests for transfer of housing loan accounts to other banks/ HF Is are received, shall be imposed w.e.f. 1.11.2003.

(xi) Oriental Bank of Commerce

Oriental Bank of Commerce vide its circular dated 15.01.2004 addressed to all its branches etc. communicated to the following effect:

Introduction of Pre-payment penalty Housing Finance market being extremely interest-sensitive, there remains a tendency amongst the customers to switchover to other bank/FI with a slight variation in interest rate.

In order to check this tendency, it has been decided to introduce one-time pre-payment penalty of 2% on the outstanding balance in case a customer intends to transfer account to other bank/F1directly/indirectly. However, pre-payment upto 25% per annum shall not attract any penalty.

(xii) Punjab & Sind Bank

Punjab & Sind Bank in its reply dated 20.10.2009 to the notice issued by the DG noted as under:

...In October 1994, the bank's regulatory authority i.e., Reserve Bank of India gave freedom to the banks for fixing interest and service charges. Further in a meeting under the aegis of IBA on 10.09.2003, the levying of pre-payment charges was agreed to by the member banks. In line with established banking practice, the bank has a well defined policy on pre-payment charges for foreclosure of loan accounts, duly published on the official website....

Further, from the circular dated 28.07.2009 issued by the bank it may be noted as under:

Pre-payment Charges

If the facilities availed from the bank is upto Rs. 1 crore and the account is adjusted through takeover of loan by another bank before 360 days from the date of disbursement, then a pre-payment charges of 2% on the WC limit, 1% on term loan outstanding and non fund limits on the adjustment be recovered;

If the facilities availed from the bank is above Rs. 1 crore and the account is adjusted through takeover of loan by another bank before 360days from the date of disbursement, then a pre-payment charges of 1% on the WC limit and on term loan outstanding and 0.5% on non fund limits on the date of adjustment be recovered;

All accounts under Personal, Car, Conveyance, Housing Schemes be levied a pre-payment charges of 1% on the balance outstanding on the date of adjustment if the account is adjusted through takeover of loan by another bank;

The borrowers under this schematic lending be allowed to make part pre-payment without any penalty in case he receives any lump-sum amounts from verifiable legitimate sources i.e. on receipt of retirement benefits, maturity proceeds of NSC, LIC etc. and wants to reduce his interest burden;

In addition to the above, in case of this schematic lending, no prepayment charge be levied, if the borrower adjusts the account in full and final before scheduled time from his own verifiable legitimate sources i.e. on receipt of retirement benefits, maturity proceeds of NSC, LIC etc.

If the processing charges are also waived for the party and the account is adjusted through takeover of loan by another bank account is adjusted through takeover of loan by another bank before 36o0 days from the date of disbursement, then, these processing charges be recovered in addition to the pre-payment penalty as stipulated for the borrower. All the sanctioning authorities are advised to insert relevant clause/condition in the sanction letter as applicable in terms of guidelines on Fair Practice Code. Necessary undertaking in this regard be also obtained from the borrower.

(xiii) Allahabad Bank

From the circular dated 30.10.2008 issued by Allahabad Bank, the following may be noted:

Pre-payment Charges for Loans Other Than Retail Credit At present there is no specific rate for pre-payment charges in the circular, and it is stipulated on case-to-case basis in the sanction letter. However, it is recommended to consider the same as under:

Term Loan Amount

Revised Rates

All loans upto Rs. 10.00 Lac

In case of Term Loan, If liquidated out of own source/own generation-Nil. In case availing loan from some other Bank/Institution -2% of the outstanding loan plus tax

All loans above Rs.10.00 lac

2% of the outstanding loan plus tax.

....

(xiv) State Bank of Hyderabad

It is pertinent to quote the circular dated 22.06.2001 issued by the State Bank of Hyderabad to the following effect:

As you are aware, presently there is no policy in the Bank to recover a charge for premature closure of term loans. The matter has been reviewed and it has been decided to lay down the following guidelines.

a) All term loans with floating interest rates, should hereafter carry a covenant to the effect that the Bank will be entitled to recover a charge on pre-payments, up to a maximum of 1% p.a. on the pre-paid amount, for the residual period.

b) The actual levy would be decided/ approved by the Managing Director.

c) The levy is applicable for pre-payments of above Rs. 5 crores.

d) In respect of all consortium advances the decision of the leader of the consortium shall be final.

Branches are advised that henceforth in all the agreements and sanction letters for term loans of Rs. 5 crores and above, the following clause should be included.

For the Term Loan with floating rate of interest, the bank shall be entitled to recover a charge on pre-payment, subject to a maximum of 1% p.a, on the pre-paid amount for the residual period and the borrower and the guarantor (s) shall pay the same without demur.

Please bring the contents of the circular to the notice of all the staff concerned.

Further, the circular dated 03.08.2004 issued by the bank is instructing and the same is quoted below:

The Bank shall recover a pre-payment charge at the rate of 2% of the pre-paid amount for both floating interest rate term loans and fixed interest rate term loans.

(xv) HDFC Limited

HDFC Limited provided a circular dated nil on the pre-payment charges and the same is quoted below:

Adjustable Rate Home Loan (ARHL) If a pre-payment is made within 3 years of the first disbursement, under Adjustable Rate Home Loan (ARHL) option early redemption charges of 2% of the amount being prepaid is payable if the amount being prepaid is more than 25% of the opening balance. Fixed Rate Home Loan (FRHL) Redemption charges of 2% of the amount being prepaid is payable if the amount being repaid is more than 25% of the opening balance. In case of commercial refinance under both the FRHL and ARHL an early redemption charge of 2% is payable. You may be required to submit copies of your Bank Statements or any other documents that HDFC deems necessary to verify the source of pre-payment.

From the narration and sequence of events as noted above, it transpires that members of IBA felt a need for a common approach in fixing pre-payment charges on loans and the issue was discussed and deliberated in the IBA meeting on 28.08.2003 which culminated in the circular dated 10.09.2003 issued by IBA to all chief executives of its member banks. It was noted therein that pre-payment charges in the range of 0.5% to 1% would be reasonable. However, decision in this regard was left to the individual discretion of banks. Thus, this meeting on 28.08.2003 was the first common meeting of banks and this even assumes significance so far as the common approach on the subject by the opposite parties is concerned.

Accordingly, as noted above, various banks issued circulars/letters for imposing a PPP on the pre-payment of loans. Thus, it can be seen that the common approach deliberated in the meetings of IBA and the collective decision taken finally led to a common practice and resulted into the levy of pre-payment charges and accordingly, it is manifest that the said action of the banks is concerted and result of common understanding and decision amongst them.

From the forgoing, it emerges that after the meeting of IBA on 28.08.2003 and pursuant to and in furtherance of its circular dated 10.09.2003, the opposite parties started adopting/modifying their approach towards pre-payment charges and the common behavioral pattern of opposite parties becomes apparent from the following table:

S. No.

Bank

Practice on Pre-payment charges

Prior to 2003 (Approx.)

Post-2003 (Approx.)

1

LIC Housing Finance Ltd

1%

2%

2

Punjab National Bank

Nil

2%

3

Indian Bank

Nil

2%

4

Indian Overseas Bank

Nil

1%

5

Deutsche PostbankHomeFinance Limited

N/A

2%

6

State Bank of India

1%

2%

7

Corporation Bank

N/A

1%

8

ICICI Bank

N/A

2%

9

Vijaya Bank

Nil

2%

10

Canara Bank

Nil

2%

11

Oriental Bank of Commerce

Nil

2%

12

Punjab & Sind Bank

N/A

1-2%

13

Allahabad Bank

Rate not specified Case to case basis

2%

14

State Bank of Hyderabad

1%

2%

15

HDFC Ltd.

N/A

2%

On analyzing the above table, it can be inferred that out of the above fifteen opposite parties, about twelve have adopted the uniform practice of charging PPP after the meeting of IBA. In case of the remaining three i.e. (1) Indian Overseas Bank, (2) Corporation Bank and (3) Punjab and Sind Bank, the practice of charging a PPP of 1% to 2% was adopted only after 2003 and before that these banks were not charging any PPP.

At this stage, it would be useful to quote the below table from the DG report to highlight the pre-payment charges currently levied by various banks which further fortifies the above conclusion on common approach adopted by the banks/ HF Cs:

S. No.

Name of Bank

Pre-payment penalty

1

Indian Overseas Bank

1% on the prepaid amount in case of term loan and other loans where the repayment of the loan exceeds one year.

2

Punjab National Bank

2% on the amount outstanding at the time of pre-payment.

3

Corporation Bank

1%-2% in the event of take over of the loan by other bank/FIs on the amount prepaid.

4

ICICI Bank Ltd.

2% in the event of repay of entire outstanding dues.

5

Allahabad Bank

In case of Term loan upto Rs. 10.00 lac, if liquidated out of own sources/own generation-NIL. In case of availing loan from some other Banks/Institutuions-2% of outstanding loan plus Tax. In case of Term loan above Rs. 10.00 lacs-2% of outstanding loan plus Tax.

6

Vijaya Bank

1% to 2% in the event of take over of the loan by other bank/FIS on the amount prepaid.

7

Oriental Bank of Commerce

In case of Term loan-1% on the amount outstanding and 2% in case of Housing Loan on the outstanding balance.

8

Canara Bank

2% in the event of transfer of the loan to other bank/FIs on the outstanding amount

9

Punjab & Sind Bank

0.5% to 2% on the amount outstanding. In case of commercial loans-no charges, if the loan has run for at least 360 days.

10

State Bank of Hyderabad

2% on the amount prepaid in the event of transfer of the loan to other bank/FIS

11

State Bank of

2% penalty on the amount prepaid in excess of normal EMI dues should be levied

India

in case of pre-closure of Home Loans within 3 years from the date of commencement of repayment.

12

LIC Housing Finance Ltd.

1% to 2% on the amount outstanding, levy of 1% of the amount prepaid as pre¬payment charges if such pre-payment is made within a period of 5 years from the date of first disbursement and the amount of loan sanctioned is over Rs.50,000/¬

13

Deutsche Post Bank

Loan against Residential Property (LARP)/Top up/ Easy Plus Loans Full Pre¬payment-3% On the outstanding principal plus taxes Full pre-payment within 6 months of the loan disbursement-5% on the outstanding principal plus taxes Part Pre-payment-3% plus taxes on the amount repaid.

14

HDFC Bank

For Auto Loan/Two Wheeler Loan-Foreclosure fees ranging from 3% to 6%. for Personal/Business/Self-Employed Professional Loans-Foreclosure fees of 4%. Waiver of charges, if any may be done by the relevant authority as per a deviation grid designed for the purpose.

15

HDFC Ltd.

Adjustable Rate Home Loan (ARHL) If a pre-payment is made within 3 years of the first disbursement under adjustable Rate Home Loan (ARHL) option early redemption charges of 2% of the amount being prepaid is payable if the amount being prepaid is more than 25% of the opening balance. Fixed Rate Home Loan (FRHL) Redemption charges of 2% of the amount being prepaid are payable if the amount being repaid is more than 25% of the opening balance. In case of commercial refinance under both eh FRHL and ARHL an early redemption charge of 2% is payable.

16

Indian Bank

For Terms Loans at 2.25% and 2% for Home Loans (inclusive of Service Tax) of outstanding balance/Drawing limit whichever is higher.

17

Axis Bank

No pre-payment penalty.

On scrutiny and analysis of this table also, it is found that after 2003 the practice of charging a PPP has virtually remained unchanged.

From the above analysis, it can be safely deduced that the understanding and decision arrived at in the meeting of IBA on 28.08.2003 was implemented and executed by it by issuing a subsequent circular letter dated 10.09.2003. The directions contained in the circular letter prescribing guidelines for adopting the policy and practice were followed by the opposite parties by issuing various circular letters referred to above. The adoption of parallel practices or common practice by the opposite parties was based on meeting of minds and unity of action on the part of the opposite parties on the subject.

The uniformity of the practice is clearly reflected in the tables drawn above which show that as a general practice, most of the opposite parties started levying a PPP at the rate of 2%. It is significant to note that some of the opposite parties also participated in the meetings of IBA and issued circular letters in furtherance of common approach adopted and the same were in consonance with the circular letter issued by the IBA. On perusal of the circular letters of opposite parties referred to above, the following conclusions may be drawn:

(i) Prior to the meeting of the IBA, there was no consensus amongst the banks for levying PPP;

(ii) Prior to the meeting of the IBA, there existed no policy guidelines of banks and HF Cs nor was there any uniform practice for levying PPP;

(iii) In the meeting of IBA, a concerted decision to adopt a common approach was arrived at by the banks for the first time. Thus the meeting of members of IBA can be treated as meeting of minds of the members for taking a concerted action against the home loan borrowers who opt to prepay the loan.

(iv) As very clearly stated in the circular of Punjab National Bank and implicit in the circulars of the other banks, the decision to levy a PPP was taken (a) in pursuance of the circular of IBA; and (b) to prevent the switching over by the consumers.

A common plea taken on behalf of the opposite parties is that there was no agreement amongst the opposite parties and therefore it cannot be said that the practice of charging PPP is consequential upon any agreement and thus the provisions of Section 3 of the Act are not attracted. On behalf of HDFC, in particular, it has been submitted that it was neither the member of IBA nor attended any meeting of the IBA nor received its circulars. In order to deal with the contentions of the opposite parties, in this regard, it is desirable to understand the meaning and the scope of the term 'agreement' as appearing in Section 3 of the Act and as defined under Section 2(b) of the Act.

The term 'agreement' is defined in Section 2(b) of the Act as follows:

2(b) "agreement" includes any arrangement or understanding or action in concert-

(i) whether or not, such arrangement, understanding or action is formal or in writing; or

(ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

It is clear that the definition includes any arrangement or understanding or action in concert whether or not formal or in writing or is intended to be enforceable by legal proceedings. Thus, it may be noticed that the definition is inclusive and not exhaustive. Further, the same has been worded in a wide manner and the agreement does not necessarily have to be in the form of a formal document executed by the parties. Thus there is no need for an explicit agreement and the existence of the agreement can be inferred from the intention and objectives of the parties. In the cases of conspiracy the proof of formal agreement may not be available and may be established by circumstantial evidence only. The concurrence of parties and the consensus amongst them can, therefore, be gathered from their common motive and concerted conduct.

The World Bank/OECD Glossary states that agreements 'may be implicit, and their boundaries are nevertheless understood and observed by convention among the different members' and 'most agreements which give rise to anti-competitive prices tend to be covert arrangements that are not easily detected by competition authorities'.

In Technip S.A. v. S.M.S. Holding Pvt. Ltd. (2005) 5 SCC 465 at 485, the court took note of the decision in the case of Guinness Plc v. Distillers Co. Plc where the Takeover Panel was to determine whether Guinness had acted in concert with Piptec when Piptec purchased shares in Distillers Co. Plc. The Panel observed:

The nature of acting in concert requires the definition to be drawn in deliberately wide terms. It covers an understanding as well as an agreement, and an informal as well as a formal arrangement which leads to the purchase of shares to acquire control of a company. This is necessary as arrangements are often informal, and the understanding may arise from a hint. The understanding may be tacit, and the definition covers situations where the parties act on the basis of a nod or a wink ...unless persons formally declare this agreement or understanding, there is rarely direct evidence of action in concert and the panel must draw upon its experience and common sense to determine whether those involved in any dealings have some form of understanding and are acting in cooperation with each other.

In Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons, (1968) 3 All ER 721, the court observed:

People who combine together to keep up prices do not shout it from the house tops. They keep it quiet. They make their own arrangements in the cellar, where no one can see. They will not put anything into writing nor even into words. A nod or wink will do. Parliament as well is aware of this. So it included not only an "agreement" properly so called but any "arrangement", however informal.

It may thus be observed that physical participation of the conspirators or members of a cartel need not be proved for establishing their common understanding, common design, common motive, common intent or commonality of their approach. These aspects can be found from the activities carried on by them and from the objects attempted to be achieved, for which evidence may be gathered from the precedent and subsequent relevant surrounding circumstances. It is also not necessary that all those sharing the common intent or common agreement must be parties to the association or present at its meeting where the decision is taken. Parties outside the group can also participate by following the decision or practice of the group. Similarly, it is also not necessary that all the conspirators or participants implement the decision at the same time. Even joining the common practice later may prove such participation as part of the concerted action. Therefore, the 'decision' to be covered within the provisions of Section 3(3) of the Act need not necessarily be simultaneous or taken at the same point of time by all parties.

In view of the above, the contentions raised by HDFC Ltd., that it was neither a member of the IBA not participated in the IBA meeting held on 28.08.2003 does not hold any force and hence is liable to be rejected.

Besides, as noted above most of the opposite parties started levying prepayment charges only after the meetings of IBA held on 28.08.2003. Pursuant to the said meeting and in furtherance thereof the opposite parties issued circulars, as mentioned above, to their branches advising them to levy pre-payment charges as per the rates prescribed therein. From perusal of the aforesaid circulars of the opposite parties and replies submitted by them before the Commission, it transpires that the opposite parties have given different justifications for imposing the said penalty ranging from asset liability mismatch to retention of customers. As can be seen from the discussion below, it is manifest that the said concerted approach adopted by the opposite parties is anti-competitive as the same falls within the mischief of Section 3 of the Act.

In view of the foregoing discussion I am of the opinion that there was an agreement amongst the opposite parties under which agreement and understanding they adopted a 'common' approach for charging a PPP. The common approach agreement was in respect of provision of banking services in which the opposite parties are engaged. Thus the provisions of Section 3(1) are fully attracted in this matter. Consequently, the finding on point No. (ii) is recorded in the affirmative.

Point Nos. (iii) and (iv)

Now I proceed to deal with the scope and applicability of Section 3(3)(a) of the Act to the facts of the present matter. The submission of the informant is that the common approach adopted by the opposite parties had the effect of directly or indirectly determining the sale prices of services. I would like to deal with this submission in the context of provisions contained in Section 3(3)(a) of the Act first and in the light of factual analysis made as above.

It may be noted that Section 3(3) of the Act, inter alia, states that any agreement entered into between enterprises or associations of enterprises or persons or association of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons including cartels engaged in identical or similar trade or goods or provision of services which directly or indirectly determines purchase or sale prices or limits of controls production, supply markets, technical development, investment or provision of services etc. shall be presumed to have an appreciable adverse effect on competition.

Most competition laws treat practices such as those mentioned in Section 3(3) as particularly grave violations of the law and usually subject these to the per se rule. I may also note again that the term 'agreement' has been defined widely in the Act as discussed earlier. Moreover, Section 3(3) of the Act includes, apart from an agreement, a practice carried on, or a decision taken by an association.

It may be emphasized that trade associations undertake activities to further the broader interests of the particular industry. However, often a trade association can function as a vehicle for cartel-type agreements whose main objective may be to manipulate the market through fixing prices, controlling/ limiting production, supply or provision of services, allocating territories or rigging bids. Frequent meetings or exchange of information in trade associations can facilitate such agreements. It is thus important for associations to be wary of the boundaries of their legitimate activities vis-à-vis the competition law.

Price fixing refers to an agreement or conspiracy among competing firms to raise, fix, or maintain the price of the goods or services they are selling. There are a myriad of ways in which firms may conspire to fix prices, such as the adherence to price schedules, adherence to formulas for setting prices, the elimination or reduction of discounts, and agreements not to lower prices or to start a price war. Not surprisingly, the pricing patterns that could trigger an investigation include the following:

(i) Identical prices may indicate a price-fixing conspiracy, especially when:

(a) prices stay identical for long periods of time; or

(b) prices previously were different; or

(c) price increases do not appear to be supported by increased costs.

(ii) Discounts are eliminated, especially in a market where discounts historically were given.

(iii) Vendors are charging higher prices to local customers than distant customers. This may indicate local prices are fixed. The pricing patterns described above suggest one potential test for collusive behavior - a test that focuses on whether pricing in a market is particularly stable.

There are many ways to implement such a test, and one economic approach is to evaluate whether the variance in prices over time is or has been relatively stable. Under this approach, highly variable pricing over time would be inconsistent with collusive pricing and stable pricing over time would be consistent with collusive pricing. The economic foundation for a price variance test is that collusion will dampen price movements because competing firms are (a) coordinating prices and (b) less likely to react to changes in their costs of production for fear of disturbing the collusive arrangement.

Use of a variance test requires a determination of the variation in price that would be expected in a competitive market. This is because the analysis involves a test of whether the actual price variation observed in the industry at hand is significantly less than the expected variation. If the price variation in a particular period of time is significantly lesser than expected, then the screen would have identified a situation consistent with potential price-fixing behavior. Such a test is easier to implement when a clearly defined period of collusion is suspected in an industry. In such instances, it is possible to use the observed variation in prices during the competitive period as the competitive benchmark and to compare it to the level of price variation observed during the period of suspected collusion.

In light of the above propositions and from the analysis of the sequence of events as narrated above, it is apparent that the opposite parties have resorted to a practice which is covered within the mischief of Section 3(3)(a) of the Act. It is instructing to note that Section 3(3)(a) of the Act includes, apart from an agreement, a practice carried on, or a decision taken by an association also. It appears, therefore, that this might cover any practice or decision of an association relating to an activity mentioned in Sub-section (3) even if some of the members of the association have not agreed with the particular decision. This aspect has been elaborated in this order while dealing with the submissions of HDFC Ltd., which claimed to be not the members of the IBA.

Accordingly, it is held that the agreement/ practice/ decision taken by the opposite parties falls within the purview of Section 3(3)(a) of the Act as it has the effect of directly or indirectly determining or fixing the prices. Point No. (iii) is therefore decided in the affirmative.

Now I proceed to deal with the nature of 'agreements' and 'practices' which are covered under Section 3(3)(b) of the Act. It is to be seen as to whether or not the 'agreement' or 'understanding' or the 'practices' adopted by the opposite parties have the effect of limiting or controlling the provision of services, viz., retail home loans to the consumers and are covered within the purview of Section 3(3)(b) of the Act.

Horizontal agreements of the nature covered under Section 3(3) of the Act are presumed to have an appreciable adverse effect on competition. These are agreements, including cartels, which (a) directly or indirectly determine purchase or sale prices; (b) limit or control production, supply, markets, technical development, investment, or provision of services; (c) share the market or source of production or provision of services by way of allocation of geographical market, or type of goods or services, or number of customers in the market; and (d) directly or indirectly result in bid rigging or collusive bidding. Thus, cartels and similar horizontal agreements are placed in a special category and are subject to the adverse presumption of being anti-competitive. This is also known as 'per se' rule.

The per se rule and its rationale were explained by the US courts in a number of cases, e.g., Northern Pacific Railway Co v. United States 356 U.S.1(1958); Arizona v. Maricopa Country Medical Society, 457 U.S. 332 (1982) and Continental T.V. v. GTE Sylvania Inc 433 U.S. 36 (1977). In Northern Pacific Railway, the court observed that 'there are certain agreements or practices which because of their pernicious effects on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and, therefore illegal without any elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints that are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable-an inquiry so often wholly fruitless when undertaken. In Jefferson Parish Hospital Distt. No. 2 v. Hyde 466 US 2 (1984), the court observed that the rationale for per se rule, in part, is to avoid a burdensome inquiry into the actual market conditions in situations where the likelihood of anti-competitive conduct is so great as to render unjustified the costs of determining whether the particular case at bar involves anti-competitive conduct. The per se rule, as opposed to the rule of reason, has been applied by the courts in respect of particularly harmful agreements such as agreements relating to price fixing, allocation of territories, bid rigging, group boycotts, concerted refusal to deal, and resale price maintenance. It should be noted, however, that in recent years the approach of the US courts has undergone a transition from a dichotomous approach based on two distinct rules, the per se rule and the rule of reason, to a more nuanced and case specific inquiry tailored to the suspect conduct in each particular case.

In Cooperative Vereniging "Suiker Unie" UA v. Commission of the European Communities, European Court reports 1975 Page 01663, it was observed that the applicant association assumed all the rights and liabilities of the four cooperatives of the old association, it must be treated as the economic successor both of the old association and of its members, which indeed is what those members intended. The applicant association did not claim before the court that its conduct on the sugar market differed from that of the former association. The conduct of the applicant and its predecessor was in continuity, which means that the whole of the behaviour is to be attributed to the applicant. The court observed:

The concept of a 'concerned practice' refers to a form of coordination between undertakings, which, without having been taken to the stage where an agreement properly so-called has been concluded, knowingly substitutes for the risks of competition, practical cooperation between them which leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the importance and number of the undertakings as well as the size and nature of the said market.

Such practical cooperation amounts to a concerted practice, particularly if it enables the persons concerned to consolidate established positions to the detriment of effective freedom of movement of the products in the common market and of the freedom of consumers to choose their suppliers.

These criteria of 'coordination' and 'cooperation' laid down by the case law of the court, which in no way require the working out of an actual plan, must be understood in the light of the concept inherent in the provisions of the treaty relating to competition that each economic operator must determine independently the policy which he intends to adopt on the common market including the choice of the persons and undertakings to which he makes offers or sells.

In Bayer AG v. Commission of the European Communities, European Court reports 2000 Page II-03383, it was observed:

The proof of an agreement between undertakings within the meaning of Article 85 (1) of the Treaty (now Article 81 (1) EC) must be founded upon the direct or indirect finding of the existence of the subjective element that characterizes the very concept of an agreement, that is to say a concurrence of wills between economic operators on the implementation of a policy, the pursuit of an objective, or the adoption of a given line of conduct on the market in accordance with the terms of that agreement is expressed. The Commission misjudges that concept of the concurrence of wills in holding that the continuation by wholesalers of their commercial relations with a manufacturer when it adopts a new policy, which it implements unilaterally, amounts to acquiescence by those wholesalers in that policy, although their de facto conduct is clearly contrary to that policy.

In Northern Pacific R. Co. v. United States 356 U.S.1 (1958), it was observed by the US Supreme Court as under:

However, there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of every one concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable - an inquiry so often wholly fruitless when undertaken.

The above observation of the US Supreme Court was also followed in the case of United States v. General Motor Corporation 384 U.S. 127 (1966).

Section 3(3) of the Act also covers cartels. A cartel is defined in Section 2(c), which states that a cartel 'includes an association of producers, sellers, distributors, traders, or service providers, who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.' This definition is inclusive and wide. A cartel of producers or sellers usually seeks to do two things: raise prices and limit output. Cartelization is regarded as the most pernicious offence since it has no redeeming feature, and there is no question about the harm that it causes to the consumers and to the economy.

From the above discussion. it is evident that the decision/practice uniformly adopted had the effect of:

a. putting an entry barrier to other banks which wanted to provide loans at a lower rate of interest to the existing borrowers in the housing loan market;

b. preventing borrowers from switching over and consequently curtailed their choice/option which amounted to controlling the supply of services; and 95. In view of the above it is found and held that action, conduct, decision, understanding and adoption of practice by the opposite parties in fixing common and uniform rates for charging PPP has resulted into limiting and controlling the provision of services in the banking sector particularly in the relevant market of home loans. In the result the conduct, action, decision and practice adopted by the opposite parties bring them within the purview of culpable cartel like conduct and collusive concerted practice which sufficiently proves infringement and breach of the provisions of Section 3(3)(b) of the Act and thus their 'conduct', 'action' and 'practice' are presumed to have appreciable adverse effect on competition as laid down in Section 3(3) of the Act.

The concept and meaning of 'shall presume', used in Section 3(3) of the Act, has been explained by the courts in India in numerous cases such as in Sodhi Transport Co. v. State of Uttar Pradesh AIR 1980 SC 1099 and R.S. Nayak v. A.R. Antulay AIR 1986 SC 2045. In Sodhi Transport Co., the court observed that 'the words 'shall presume' have been used in the Indian judicial lore for over a century to convey that they lay down a rebuttable presumption in respect of matters with reference to which they are used...and not laying down a rule of conclusive proof.' The court also observed that ' a presumption is not in itself evidence but only makes a prima facie case for the party in whose favour it exists. It indicates the person on whom the burden of proof lies. But when the presumption is conclusive, it obviates the production of any other evidence. But when it is rebuttable, it only points out the party on which lies the duty of going forward on the evidence on the fact presumed, and, when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of presumption is over'. This suggests that in the case of horizontal agreements listed in Section 3(3) of the Act, once it is established that such an agreement exists then it will be presumed that such an agreement is anti-competitive and has an appreciable adverse effect on competition in the market.

Thus the presumption laid down under Section 3(3) of the Act is rebuttable. The opposite parties have attempted to rebut the presumption by submitting detailed arguments. However, the grounds taken for rebutting the presumption are to be tested on the touch stone of guiding factors laid down under Section 19(3) of the Act which are being reproduced as under:

Section 19(3)

The Commission shall. While determining whether an agreement has an appreciable adverse effect on competition under Section 3, have due regard, to all or any of the following factors, namely:

(a) creation of barriers to new entrants in the market;

(b) driving existing competitors out of the market:

(c) foreclosure of competition by hindering entry into the market

(d) accrual of benefits to consumers

(e) improvements in production or distribution of goods or provision of services: or

(f) promotion of technical, scientific and economic development by means of production or distribution of goods and provision of services.

A combined reading of Section 3(3) and Section 19(3) of the Act suggests that although the term 'appreciable adverse effect on competition', used in Section 3(1) has not been defined, however, Section 19(3) of the Act states that while determining whether an agreement has an appreciable adverse effect on competition under Section 3 of the Act, the Commission shall have due regard to all or any of the above mentioned factors. The first three factors laid down in Section 19(3) of the Act, viz., (a), (b) and (c) relate to negative effects on competition while the remaining three relate to beneficial effects. Thus, in assessing whether an agreement has an appreciable adverse effect on competition, both the harmful and beneficial effects, as reflected in the above factors, are to be considered.

In the context of the foregoing analysis, if I examine the issue at hand then it becomes apparent that the pre-payment charges act as entry barriers to new entrants, hence factor (a) creation of barriers to new entrants in the market is present. Further, factors (b) driving existing competitors out of the market and (c) foreclosure of competition by hindering entry into the market are also found to be present. Moreover, factors (d) accrual of benefits to consumers; (e) improvements in production or distribution of goods or provision of services; and (f) promotion of technical, scientific, and economic development by means of production or distribution of goods or provision of services are found to be totally absent in the present matter. Thus, it can be concluded that factors which relate to negative effects on competition are present and the factors which relate to beneficial effects are found to be absent.

Besides the above, in particular, It may be noted with emphasis that one of the most prominent and important factor mentioned in Section 19(3) of the Act is accrual of benefits to consumers. The opposite parties have woefully failed to adduce an iota of evidence to suggest that the imposition of pre-payment charges has resulted into accrual of benefits to consumers. On the contrary, it is found that the said practice is detrimental to and adversely affects the interest of consumers. Therefore, I am of considered opinion that the 'agreement' reached amongst the opposite parties is covered within the per se rule contained in Section 3(3) of the Act even on considering the replies of the opposite parties and evidence adduced in rebuttal of this presumption by them, it is concluded that the opposite parties have failed to demolish the presumption contained therein. Rather, the said presumption is strengthened by the detriment which this practice causes to the interest of consumers. On the basis of the aforesaid discussion, point No. (iv) is to be determined against the opposite parties and is decided in the affirmative.

Common plea of asset liability mis-match

The opposite parties have sought to raise the main plea of asset liability mismanagement as justification for the practice of levy of pre-payment charges and I therefore deem it necessary to specifically deal with their contentions in this regard.

The opposite parties have argued that PPP is levied in order to prevent volatility and to meet the increase in capital cost; it is not penal in nature but is aimed to regulate cost of funds and is within fair practice guidelines of the RBI; the issue of asset liability mismatch are genuine commercial realities and is a fundamental issue which banks and financial institutions face and therefore, necessitate banks to stipulate pre-payment charges in order to adequately address such mismatch; the applicable pre-payment charges and related terms and conditions are informed clearly to the borrowers upfront as required by the regulatory authorities and as a good commercial and consumer friendly practice, the practice of PPP enhances certainty of cash flow and serves as incentive for investors in securitization instruments. Therefore, as a natural corollary, the said incentive translates into lower rates on the securitized instruments, which in turn results in low cost loanable funds for the banks and financial institutions. The said low cost loanable funds reduce the interest rates and costs to the home loan borrowers in the relevant market. Thus, the practice of charging pre-payment penalty enhances consumer welfare rather than affecting them adversely.

I have carefully considered the above submissions made by the opposite parties on the issue of asset liability mis-match and having given my thoughtful consideration thereon, I don't find any force in the same. There may be economic hardships but the same cannot be taken note of in abstract by the Commission unless these points are brought within the purview of the factors enumerated in Section 19(3) of the Act to demolish the presumption of appreciable adverse effect on competition as contained in Section 3(3) of the Act.

The asset liability mis-match argument does not support a penalty charge at the rate of around 2% or otherwise. Moreover, in an increasing interest rate scenario, the lender may actually be benefited by a pre-payment of the loan because the lender would have raised the money at a lower rate of interest and can now post receipt of the funds, re-deploy the same at a higher rate, so there is no substance in the argument that prepayment charges are levied to compensate the loss by the banks/ HF Cs. Further, ALM is not account specific and there is no evidence to show that it matches the tenors of all deposits with all loans. Hence, it may be appropriate to state that neither the 'asset' is defined and quantified at relevant stages nor the 'liability' is worked out and specified on the basis of cost transactions. Thus, neither the 'fund' is identified nor the cost of the fund is furnished. In absence of such details and data, the plea of 'mis-match' of 'asset- liability' or risk of 'fund-management' are to be treated as only a theoretical notion and not pragmatic and empirical factors. Besides, the opposite parties have totally failed to show as to how PPP is beneficial to the consumers.

It may further be observed that through the pre-payment of loan, the principal money is repaid well in advance to the banks through foreclosure. Even if it is paid through switching over from one bank to another, the banks get their principal money well before the tenure of the loan and this provides an opportunity to the banks to further increase the money supply to the market. Hence, PPP is in effect an enhancement of interest rate from backdoor. The lenders advertise a lower interest rate but in effect charge a higher rate due to such hidden penal charges. Further, the argument that if banks will not charge a PPP they will try and charge some other amount as to cover the costs, is fallacious as it seeks to justify the current practice on a hypothetical or conjectural basis.

It may be noted that if we calculate the equated monthly installments (EMI) and the 'time value for money', it will be evident that banks are unreasonably charging foreclosure amount as the consumer is bound to pay more first in terms of interest portion in the initial months of the payments and later, he is made to pay in terms of pre-payment charges if he decides to foreclose for better options. The banks/ HF Cs also recover their administrative expenses at the time of disbursement of loan and also recover the interest portion through the initial installments.

Moreover, it is pertinent to mention that some of the banks/HF Cs in their internal circulars have indicated reasons for levying pre-payment charges, viz., to dissuade the customers from switching their loans from one bank to another. Thus, it is apparent that the plea advanced by such banks on the grounds of asset liability mis-match is an afterthought and needs to be rejected.

In any event, the opposite parties have miserably failed to give any economic justification for levying such charges which may be considered for the purposes of assessment of competition within the ambit of the Act. Therefore, the plea of the opposite parties on this ground being without any justification/data is wholly misconceived and deserves to be rejected.

In view of the above discussion, I hold that the common approach adopted by the opposite parties in levying the PPP can not be justified on the grounds of assetliability mis-match and the same is violative of the provisions of Section 3(3)(a) and 3(3)(b) of the Act.

At this stage, it is interesting to note another submission made by the opposite parties on the basis of the research report of CRISIL dated March, 2009 wherein it is observed that the home loan market has registered a growth of 43% from 2000- 2001 to 2004-2005 i.e. during and after the period of the IBA circular. The opposite parties have argued that there is no material evidence available to disagree with findings of a neutral and reputed research organization nor has the DG report given any facts contrary to the contentions of the opposite parties regarding the state of competition in the home loan sector or the appreciable growth seen in the last decade. Accordingly, it has been canvassed that there is no reason to believe that the practice of charging PPP has resulted in limiting provision of home loans in the Indian market.

On considering the entire material, I am not persuaded to accept the contention urged by the opposite on the issue of reliance upon the report of CRISIL which is claimed to be a neutral and reputed research organization. Firstly, in the absence of any material relating to the methodology and sample size adopted by the organization, it is not possible to rely upon the report. There may be diverse reasons for the growth in the relevant sector and it is very difficult to speculate, in the absence of any concrete material, the reasons for such growth. In any event, it is nobody's case that imposition of PPP has resulted into such growth.

Approach of Regulators, Competition authorities, Forums and Courts

Some of the opposite parties have argued that they are also subject to prepayment charges for borrowings as per the terms of the contract with banks and other lending institutions. It has been further argued that even the NHB which itself is a regulator of housing bank companies levies pre-payment charges on the amount proposed to be prepaid before the due date. As the opposite parties in their submissions have repeatedly referred to the decisions of regulators like RBI and NHB and have also referred to various decisions, I consider it necessary to deal with the approach on the subject by the regulators, domestic and foreign, competition authorities, forums and courts.

Approach of National Housing Bank (NHB)

The NHB provides refinance to the HF Cs and the commercial and cooperative banks under its Charter in the NHB Act. The refinance assistance is provided by way of bulk/wholesale financing to these institutions, with NHB acting as the apex backstop financing institution. In order to meet its fund requirements, NHB raises funds on wholesale basis from the market and other institutions including external funding from multilateral agencies.

Thus, it was to be submitted before the D.G. by NHB that the business model for NHB is very different from that of the primary lending institutions, viz., HF Cs and commercial banks. The latter's business is essentially of retail nature, which provides adequate flexibility in their operation, even on day-to-day basis. In view of the retail nature of their business operations, they also have flexibility in mobilizing funds and making changes in their lending rates quite frequently. As a wholesale refinancing institution, NHB has a very different nature of business operations, including its asset-liability profile as compared to a retail lending institution. Accordingly, NHB raises and deploys bulk finance under the prevailing market conditions. Also, in such role, NHB does not have the flexibilities, as available in the retail business, in either mobilizing funds or in its deployment, in terms of quantum of funds as well as interest rates. While the PL Is can relent the amounts received from their borrowers, at different rates of interest, NHB's lending rates are stable and fixed over a longer period of time.

It has been explained that the NHB seeks to channelize long term funds to the housing sector, as part of its Charter and policy. This, in turn, requires raising long term funds and lending for long periods for better affordability. This aspect, together with bulk lending feature, results in certain in-built risks in the business model of NHB, different from that of the retail lending institutions. As a matter of policy, therefore, NHB disincentives the pre-payments (bulk amounts) from its client institutions by way of imposing a PPP which is currently a flat rate of 1% of the amount prepaid. Moreover, NHB's refinance to its client institutions normally does not exceed 20-25% of their funds requirements.

I have very carefully considered the submissions made by some of the opposite parties on the issue with reference to the practice followed by NHB. At the outset, I may mention that NHB is not a party in these proceedings, nor any information there against has been filed before the Commission in this regard. Besides, the Commission has to examine the practice of levying PPP by the banks/HF Cs in the light of the provisions contained in the Act and not by reference to any such practice being adopted by NHB or any other entity. Thus, the submissions of the opposite parties by referring to and relying upon the practice of imposition of PPP by NHB to justify their practice are wholly misplaced and thoroughly misconceived and accordingly the same need to be rejected.

Be that as it may, I have referred to the reply of the NHB in detail only to highlight that the business model followed by the NHB is different and is accordingly distinguishable from the business model followed by banks/HF Cs. Besides, it may be noted that NHB is also a regulatory body and in the circumstances and in the light of the above discussion, no sustenance can be derived from the practice followed by the NHB to justify or to legitimize the practice followed and adopted by the opposite parties.

At this stage, I may also refer to the latest circular dated 18.10.2010 issued by the NHB to all registered HF Cs on the issue of PPP on pre-closure of housing loans and the same is quoted below for ready reference:

Pre-payment penalty on pre-closure of housing loans

The issue of levying pre-payment penalty or pre-payment charges by housing finance companies on pre closure of housing loans by the borrowers out of their own sources has been considered by the National Housing Bank and it has been decided that housing finance companies should not charge pre-payment levy or penalty in such cases.

It is, therefore, advised that pre-payment levy or penalty should not be collected from the borrowers when the housing loan is pre-closed by the borrowers out of their own sources. All HF Cs are advised to ensure compliance of the above with immediate effect.

Please note that non-compliance with the above advisory may attract penal consequences under the National Housing Bank Act, 1987.

Thus, it can be noticed that the NHB has not fully approved the practice of imposition of pre PPP on pre-closure of housing loans. The letter is totally silent on the issues relating to imposition of PPP if the loan is pre-paid by switching over or refinancing from other banks. No positive or future guidelines have been provided in this letter. In any case the NHB has never expressly approved the uniform approach and the fixed rates for charging PPP as has been practiced by the opposite parties.

Approach of Reserve Bank of India

The DG vide its letter dated 05.11.2009 addressed to the Reserve Bank of India (RBI) requested that the views of the RBI on current status of the proceedings on PPP, if any, pending with the RBI as well as the claim of the banks justifying the PPP may be informed.

In reply, the RBI vide its letter dated 11.12.2009 stated as under:

...We advise that as regards pre-payment/foreclosure charges, RBI has not issued any specific guidelines. Banks generally levy charges for foreclosure of loans as it adversely impacts their asset-liability management. In terms of extant instructions, 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 pre-payment/foreclosure charges on loans. With effect from September, 1999, banks have been given the freedom to fix service charges for various types of services rendered by them. While fixing service charges, banks should ensure that the charges are reasonable and not out of line with the average cost of providing these services. Further, in terms of the Fair Practices Code for Lenders issued by RBI, (extract enclosed) banks have been advised that loan application forms should be comprehensive and should include information about the fees/charges, if any, payable for processing, the amount of such fees refundable in the case of non acceptance of application, pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower. Also, in terms of RBI's circular DBOD. No. Dir. BC.56/13.3.00/2006-2007 dated February 2, 2007 on "Principles for ensuring reasonableness in fixing and communicating the service charges" (copy enclosed), banks have been advised that they should make basic banking services available at reasonable prices/charges to customers.

Thus, from the aforesaid reply of RBI as also the letters/ Fair Practices Code mentioned therein, it is manifest that RBI has given banks the freedom to fix service charges for various types of services rendered by them including pre-payment charges on loans. However, RBI has stressed that while fixing service charges, banks should ensure that the charges are reasonable and not out of line with the average cost of providing these services. Moreover, in terms of the 'Guidelines on Fair Practices Code for Lenders' issued by RBI, banks have been advised that loan application forms should be comprehensive and should include information about the fee/charges, if any, payable for processing, the amount of such fee refundable in the case of non-acceptance of applications, pre-payment options and any other matter which affects the interests of the borrower, so that a meaningful comparison with other banks can be made and an informed decision can be taken by them. Therefore, while banks have the freedom to levy service charges on all matters pertaining to banking transactions, including pre-payment/foreclosure of loans, banks are required to ensure transparency in providing information regarding such charges with the expectation that the freedom given to the banks will foster healthy competition amongst banks to keep service charges at reasonable levels which would ultimately benefit the customer.

It would be appropriate to make a reference to a news item appearing in the Economic Times on 18.10.2010 under the caption 'RBI sets its face against prepayment penalty' wherein it has been reported that in a meeting with Chief Executives of Banks last week, RBI Deputy Governor K.C. Chakrabarty took the stance that banks waive the clause on pre-payment penalty in mortgage documents since it is anti-competitive as the RBI sees no case for such a levy given that lenders don't play a fair game with borrowers. Thus this regulator too has not prescribed any policy guidelines for charging a PPP.

Approach of Consumer Courts

The State Consumer Disputes Redressal Commission, Delhi in Appeal No. 07 of 130 decided on 27.04.2007 dealing with the issue of pre-payment charges held as under:

Any consumer availing such a loan always avails service of those banks which charge lesser rate and if he is not aware of the lesser rate being charged by particular bank and avail the service of government bank which normally and ordinarily is supposed to charge not more than what the private banks are charging and if at later stage he finds that government bank is charging much higher rate of interest he would naturally make request for transfer of the loan amount and therefore such a request cannot come within the ambit of terminology of "pre-payment" as it has to be deemed a case of "takeover".

----

No bank or for that purpose finance companies can be allowed to indulge in restrictive trade practice by binding the consumer to go on availing loan even if rate of interest charged by the said bank is much higher than the other banks and any such clause which operates adversely to the consumer like Clause 4 has to be held as void and therefore not enforceable.

A revision petition was preferred against the aforesaid decision of the State Commission before the National Consumer Disputes Redressal Commission being Revision Petition No. 2466 of 2007. However, the National Commission vide its order dated 26.07.2007 summarily dismissed the same by observing that the consumers' right to avail loan facility at a lesser rate of interest should not be curtailed by certain clauses of the alleged agreement between the parties.

It may be noted that a special leave petition was filed against aforesaid decision of the National Commission before the Hon'ble Supreme Court of India. The Hon'ble Supreme Court of India vide its order dated 19.09.2008 in SLP (Civil) No. 16345 of 2007 found no ground to interfere with the same and dismissed the petition by keeping the question of law to be decided in an appropriate case.

However, it may be observed that the practice of PPP is found to be to the detriment of consumers. Although the judgment is in the context of Consumer Protection Act but the rationale is suggestive of the approach that courts have deprecated the unreasonable practices and restrictive practices in the banking sector.

Approach of the Banking Ombudsman

I may also refer to the news item appearing on www.livemint.com posted on 10.10.2010 under the caption 'Cheap Home Loans the Next Big Issue?' which states that recently, the banking ombudsman in Delhi ruled in favour of two home loan borrowers against a bank. Both claimed that they had not received the benefit of a floating rate of interest on the loan they had taken and had been paying high interest rates even when new borrowers were being charged less. Also, when they wanted to prepay their loans, the bank did not allow them to do so without a pre-payment penalty. The ombudsman has directed the bank to waive the penalty if they choose to prepay their loans or give them the benefit of a lower interest rate being offered to new borrowers.

Approach in Foreign Jurisdictions/Decision of French Conseil

Now, I may also refer to a decision dated 19.09.2000, of the Conseil de la concurrence which penalized several major banks and credit establishments, when it found guilty of implementing an anti-competitive agreement in the sector for property loans to private individuals in 1993 and 1994.

In the early 1980s, long-term mortgage rates peaked at 20%, before dropping sharply within a few financial quarters from 1985, stabilizing at around 12% in late 1992, when they registered another substantial drop until 1994. They then reached a level of between 7.5 and 9%.

During periods of falling rates, when the difference between the rates practiced for new property loans and the rates practiced in the previous period reaches around 2%, there was an advantage for holders of loans with over five/seven years still to run either to renegotiate their loan conditions with their bank, or to profit from competition between banks by paying off their loan early and renegotiating a new loan with a new lender.

These loans could therefore lead to an early redemption at the initiative of the borrower, for compensation which, under the consumer code, shall not exceed the equivalent of six months of interest and at the most 3% of capital still outstanding.

The Conseil de la concurrence found that, faced with this situation, the main investment establishments had reached an "inter-bank non-aggression pact", under which each of them refrained from making offers to customers of other banks who wished to renegotiate their property loans.

Besides aiming to prevent competition between banks, this agreement enabled each of them to better resist requests by their own customers to renegotiate their loans, since the customers in question were subsequently unable to turn to another bank in the event of their request being refused. Such concerted action between the main players in a market, aimed at distorting price competition, was found to be prohibited by the Ordinance of 1st December 1986 relative to price freedom and competition. In addition, it constituted an anti-competitive practice that was viewed as particularly serious by all competition authorities.

The Conseil de la concurrence, which had assumed jurisdiction on its own initiative, indicated that whilst banking activities are governed by specific regulation, like all other service activities, whether regulated or not, they are still subject to competition law. The Conseil also indicated that the competitive workings of the market are based on the independence and autonomy of the players involved. It stated that when concentration practices lead to the removal of any uncertainty they effectively distort competition, since each establishment is assured that the other banking networks will apply the same commercial policy.

The Conseil noted that, even if a cartel agreement between banks was not applied in a uniform manner, borrowers were deprived of the option of significantly reducing their property debts, whereas property represents the most substantial investment by households, and the repayment of loans required for this investment accounts for 30% of their disposable income.

Approach of OECD

The OECD in its policy roundtable in 2006 on 'Competition and Regulation in Retail Banking' has stated:

Customer mobility and choice is essential to stimulate retail-banking competition.... Switching costs are costs that existing customers have to incur when changing suppliers. Conceptually, we can distinguish between the fixed transactional (or technical) costs of switching a bank and informational switching costs....

We consider three different but complementary means to reduce switching costs, which are:

(a) First, greater consumer education and financial literacy about financial alternatives may help to promote greater willingness of consumers to switch from one institution to another and reduce bank rents from switching costs. Information about prices and more transparency is desirable to promote consumers' possibilities to compare financial institutions.

(b) Second, switching "packs" that simplify the administrative steps for switching should be promoted. Setting up "switching arrangements" or "switching packs" can reduce the administrative burden and hence reduce the costs of switching.

(c) Third, account number portability may merit further consideration if its potential benefits would clearly outweigh the undoubtedly high costs.

Closing charges, when applied, can be an important transactional switching cost. A clear distinction should be made between closing charges related to administrative costs (e.g.; when closing an account) V. closing charges that are related to interest rate exposure (e.g. when prepaying a mortgage). Closing charges related to administrative costs differ dramatically across banks and countries, with some banks having no closing charges whereas others (like in Italy) fall in the range of 15 to 60 . These charges should be abolished, as they may hinder switching and ultimately relax competition. But closing charges that are related to interest rate exposure may reflect underlying costs that financial institutions incur. For example, mortgage pre-payments generate reinvestment risks for financial institutions, as pre-payments typically happen when interest rates drop, implying that financial institutions then must reinvest at lower rates. To the extent that closing charges related to interest rate exposures reflect the underlying risks that banks and borrowers incur, and customers and banks can contract these closing charges, these options may be valuable to both banks as firms as they allow desirable risk sharing between banks and customers. As a reference, fixed-rate loans without pre-payment options might exhibit lower loan rates than with pre-payment options present. Other technical switching costs related to prepaying mortgages that do not reflect economic fundamentals should be abolished.

Thus it can be noted that imposing switching costs hinders mobility of consumers and ultimately, affects competition.

Now, I shall advert to the issue of transparency/ reasonableness/ justification by the opposite parties for levying a PPP.

Transparency/ Reasonableness/ Justification of Pre-payment Charges (Asset Liability Mismanagement)

On perusal of the replies filed by the opposite parties to the notices issued by the DG or the replies/comments/objections filed by the opposite parties to the report of the DG, it appears that the opposite parties have not succeeded in explaining the rationale and justification for levying the PPP.

The Commission during the course of hearing on 19.05.2010 sought certain clarifications from the opposite parties which, inter alia, related to the rationale behind fixing the pre-payment penalty at the rate in the range of 2% to 2.5% (and not 1% or 0.5%).

In response thereto, the Indian Bank submitted in its reply dated 03.06.2010 that banks secure funds by way of deposits at a fixed rate of interest, which is a liability to the bank. Such funds are deployed in lending on contracted period at a contracted rate. Pre-payments are unexpected receipts which require to be redeployed for better yields/returns, and disturb asset liability match. Such unplanned receipts distort asset liability planning. It has also been submitted that the RBI has acknowledged the fact that pre-payment adversely impacts the ALM of the banks. The unexpected receipts are kept in current accounts with RBI, which carries no interest or are deployed in money market at a low rate of interest. In order to compensate the loss due to interest difference (interest earned on such surplus funds and the deposit interest rates), banks charge pre-payment charges. Normally, the unpaid installments are charged with penal interest of 2 to 2.5%. Banks also charge pre-payment charges around 2 to 2.5%. The average loss incurred by banks on alternate investment may be estimated around 2 to 2.5%. For the investment risk it is not feasible to factor the same with the rate of interest alone considering the cost and time involved in acquiring a new customer. Taking a holistic view of the above, the rationale behind charging the pre-payment charges of 2% may be appreciated.

Similarly, the Indian Overseas Bank vide its reply dated 03.06.2010 has very conveniently evaded the queries by not dealing with the same at all and therefore, the only conclusion which may be drawn from this is that the bank has no data to justify the PPP or the rate of 2%.

The State Bank of Hyderabad vide its reply dated 03.06.2010 has submitted that PPP is levied by the bank are in accordance with the letter dated 04/05 May, 2010 issued by the Ministry of Finance to all public sector banks whereby it has been mandated that no pre-payment charges are to be levied when the loan amount is paid by the borrowers out of their own sources. The pre-payment charges, if any, to be imposed by the banks on housing loans, the same need to be reasonable and not out of line with the average cost of providing these services.

However, it may be noted that the SBH in its reply has not addressed the query raised by the Commission and accordingly the same inference has to be drawn against this bank as well. The SBH in its aforesaid reply has stated that it levies a PPP of 2% on housing loans which in fact may not even cover the costs incurred by the bank in respect of grant of such housing loans. Thus, it can be seen that the reply of the bank is vague and does not address the points raised by the Commission. No details or data have been provided by the answering bank to support such plea.

Thus, from the analysis of the replies furnished by the opposite parties, it appears that no details/data or working of transaction cost or of liabilities have been supplied to support or to justify the levy of PPP.

It may be noted that even in competitive markets serious consumer problems may arise. These are principally related to information failures that may lead to situations where consumers are not able to take the advantages made possible by effective competition. Consumers might have insufficient information about the choices they can make or they face high search and switching costs and consequently, conclude bad deals or get disconnected to certain markets. In such situations consumers are unable to activate competition and this ultimately retards competition. Consumer protection has a comparative advantage in addressing information failures like imperfect information and information asymmetries. Its true focus is to provide good quality and cost of consumer information and to make well informed decisions possible.

Consumer information problems actually form relevant issues for competition law as well. Information failures can distort the working of an otherwise competitive market and can lead to sub-optimal effects and inefficiency. The cause of ineffective competition might be rooted in consumer information asymmetry and welfare losses might be the result of search and perceived or actual switching costs of consumers. Therefore in certain situations the impact of information asymmetries and the exercise of consumer choice form an important part of a careful market assessment. While information imperfections may not warrant competition scrutiny on the basis of the rule of law, they might exacerbate anti-competitive effects or provide an efficiency justification for such a conduct.

On perusal of the replies filed by the opposite parties to the notices issued by the DG or the replies/comments/objections filed by the opposite parties to the report of the DG, it appears that the opposite parties have not come clean for justifying levying of PPP on the ground of transparency also.

At this stage, it would be relevant to mention that the opposite parties have very conveniently evaded the queries raised by the DG and the same would become apparent from the quotation thereof. It would be appropriate to quote illustratively the questionnaire dated 05.10.2009 whereby the following information was sought by the DG from the Indian Bank:

(i) The reasons for and basis of charging any prepayment charges, by whatever name called, if the loan is returned before it is due, whether in part or in full, as it does not result in any advantage to the borrower but it restrains him/her, in whichever way, from availing any cheaper loan, if available, from elsewhere.

(ii) Certified copies of the circulars issued by the Bank regarding foreclosure/prepayment charges/penalties on various types of consumer loans, since the date of initiation of such charges/penalties.

(iii) Background discussion papers/material if any on such prepayment charges.

(iv) Whether any internal principles and procedures have been laid out for usurious interest, processing and other charges as advised by RBI....

Similarly, it would be further necessary to quote the further questionnaire dated 10.11. 2009 sent by the DG to the Indian Bank as under:

(i) Please confirm whether any representative on behalf of your bank has attended the Indian Bank Association (IBA) meeting held on 10.09.2003 with regard to pre-payment penalty. If yes, provide the background note, agenda and minutes of the IBA meeting dated 10.09.2003 and circular, if any, issued after the meeting.

(ii) Reference is drawn to your circular No. ADV/133/05-06 dated 18.01.2006, page 4, under the caption "Others" which states that: "Prepayment charges of 2% on the drawing limit is applicable for loans sanctioned with effect from 01.08.03. Now prepayment clause i.e. Penalty clause may be waived, provided, the loan is closed out of the own resources and it is not by shifting of loan account to other Bank/Institutions.... This shows that the main focus of levying the prepayment penalty is to prevent existing borrowers to benefit from lower interest rate available by competing banks than the Asset Liability Management (ALM). The said act of bank to prevent its existing borrowers from availing the best prevalent market rate, on the fact of it, is anti-competitive in terms of Section 3 of the Competition Act, 2002. You may submit your views on this.

(iii) RBI vide circular DBOD.BP.BC.8/21.4.098/99 dated February 10, 1999 on Asset Liability Management (ALM) has specified prudent guidelines which covers among others, interest rate risk and liquidity risk of the banks. The said guidelines through Maturity Profile-Liquidity, Statement of Structural Liquidity and Short term Dynamic Liquidity specify management of cash out flow and cash inflow of banks. In context of a bank, asset-liability management refers to the process of managing the net interest margin (NIM) within a given level of risk. You are requested to clarify how imposition of prepayment penalty is justified in managing the gap (mismatch of cash outflow and cash inflow) in context of Asset Liability Management of the Bank?

(iv) Does the bank offer Reverse Mortgage Loan (RML)' If yes, does bank levy prepayment charges on Reverse Mortgage Loans as well?....

As noted elsewhere, the replies filed by the opposite parties have not adverted to or dealt with the queries raised by the DG in his aforesaid questionnaires and resultantly I am constrained to hold that the opposite parties do not have any economic data to support their contention for levying a PPP.

It may be observed that the RBI has given freedom to banks to fix service charges for various types of services rendered by them including pre-payment charges on loans. However, RBI has stressed that while fixing service charges, banks should ensure that the charges are reasonable and not out of line with the average cost of providing these services. In the light of above discussion, it is manifest that the opposite parties have made no such effort to justify the levy of PPP and accordingly, it is held that the said charge is in violation of the Fair Practices Code for Lenders issued by the RBI.

At this stage, I may also refer to the letter dated 04/05.05.2010 issued by the Department of Financial Services, Ministry of Finance, Government of India to the CE Os of all public sector banks, it appears that after examining the issue of prepayment charges on housing loans, the Government requested the banks to ensure, in letter and spirit, that no pre-payment charges are levied when the loan amount is paid by the borrowers out of their own sources and the pre-payment charges, if any, to be imposed by the Banks on housing loans, the same need to be reasonable and not out of line with the average cost of providing these services.

In the light of replies given by the opposite parties it is not possible to reach any definite conclusion that PPP levied by them is reasonable and is not out of line with the average cost of providing services as no details have been provided by the opposite parties and accordingly, it is held that the levy of a PPP by the opposite parties is also in contravention of the directions issued by the Ministry of Finance on the issue.

Before concluding my discussion on this issue, I may again refer to the approach of the RBI which while giving freedom to the banks to levy service charges requires transparency in providing information regarding such charges. As can be seen from the following, no such transparency has been maintained by the banks in levying the PPP.

Now, I may refer to illustratively some home loan agreements entered into by the opposite parties with the customers to highlight the complete lack of transparency therein in as much as some of the banks have not even indicated the rate of PPP leave alone the basis to arrive thereat.

(i) HDFC Ltd.

Clause 2.8 headed as 'Pre-payment' of home loan agreement of HDFC is quoted below:

2.8 Pre-payment

The borrower shall be entitled to prepay the loan, either partly or fully, as per rules of HDFC, including as to the pre-payment charges, for the time being in force in that behalf.

(ii) Deutsche Post bank Home Finance Limited

Clause 2.7 headed as 'Pre-payment' of home loan agreement of Deutsche Post bank Home Finance Limited is quoted below:

2.7 Pre-payment

(i) The Lender may, in its sole discretion and on such terms as to prepayment charges etc., as it may prescribe, permit acceleration of EM Is on pre-payment at the request of the Borrower.

(ii) If permitted by the Lender, the Borrower shall give written notice of his intention to prepay the full amount of the loan and pay to the Lender such pre-payment charges which is subject to change by the Lender from time to time.

(iii) The Borrower agrees that no pre-payment can be made during the first 6 months from the date of execution of this agreement of till the loan is fully disbursed, whichever is later.

(iii) LIC Housing Finance Ltd.

Proposed Clause 7 (b) of the Terms and Conditions of the Loan Offer Letter reads as follows:

7(b) You will be at liberty to make either full payment or part payments towards the principal in multiples of Rs. 2000/- (Rupees Two Thousand Only), at any time after the expiry of 6 months from the date of disbursement of the loan or the first installment thereof, provided, however, that no installment of interest/EMI is in arrears on the date of payment and provided further that such payment will not interfere with, or affect the payment in due course of the subsequent monthly installments of Interest/Additional Interest or EM Is, if any. Such pre-payment shall carry Levy Charge of 2% of the amount pre-paid. Further, Interest for the full month, calculated on the amount of loan outstanding at the beginning of the month will be playable, irrespective of the date of payment of part/full Principal. Also, where the lump sump offered in repayment is 25% of the loan outstanding or Rs .10,000/- whichever is less, the subsequent EM Is may be rescheduled at the discretion of the Company. In such an event, EMI will be re-calculated on the amount of loan outstanding as at the end of the month in which the payment is made for the remaining period of the loan.

(iv) Indian Bank

Clause 20 of the Term Loan Agreement for Housing Finance reads as follows:

In the event of pre-payment of the loan by the borrower(s) before the stipulated repayment schedule, the bank is entitled to levy a pre-payment charge of.... % or at such rates as per the Bank's rules in force on the applicable drawing limit or on the balance outstanding, whichever is higher.

Thus, it can be seen that the pre-payment charges have not been indicated in clear terms in the agreement. Rather the same are stated to be as per rules for the time being in force which clearly reflects complete lack of transparency, reasonableness and justifiability.

Concluding Remarks

In view of the foregoing discussion and observations made while dealing with the points formulated for determination as above, for the sake of clarity and at the cost of repetition the following concluding remarks are being noted:

i) Before the meeting of the IBA on 28.8.2003, the HF Cs and some banks were charging a PPP on the basis of their individual policy which was motivated for augmenting their profits. These institutions, however, adopted different objectives and yardsticks for doing so. For example, as found from the circular of HDFC dated 12.9.2004, this financing company decided not to levy any early redemption charges on loans granted to non-resident Indians. It may be noted that the ground of asset liability mis-match was not the basis for early redemption charges.

ii) The LIC Housing Finance Ltd. also started charging a PPP to meet the challenge from its competitors, i.e., HDFC and also from later entrants such as ICICI Ltd., etc. The obvious objective of these companies was to deter competition and to prevent the flight of loan from the existing banks/ HF Cs to the other entrants offering a lower rate of interest on housing loans. It is also obvious that the practice of charging a PPP was neither widespread or uniform nor based upon working of any cost factors or economic methodology or sound financial strategy.

iii) In the meeting of the IBA, a concerted action in the shape of a policy decision was taken and for adopting a concerted practice, circular letter dated 10.9.2003 was issued, which clearly reflected the collective/common decision of the members that levy of a PPP in the range of 0.5% to 1.00% would be reasonable. Thus, the meeting on 28.08.2003 was a meeting of minds of banks in which a definite decision was taken on the subject of charging PPP. The banks generally followed the decision and thereafter, started adopting the practice for charging a PPP.

iv) The analysis of the follow up actions by banks/HF Cs demonstrates that out of fifteen opposite parties, twelve opposite parties started adopting the practice of charging PPP at a rate of 2%. The other three opposite parties namely Indian Overseas Bank, Corporation Bank and Punjab & Sind Bank which were not earlier charging any PPP started charging the same at a rate of 1 to 2% after 2003. These findings are gathered and reflected in the table supra. This practice as adopted by the opposite parties is in the nature of a cartel like behavior and anti-competitive practice.

v) On examination of the circular letters, it is clear that the same were issued as pursuant to the policy decision taken by the banks at the IBA meeting on 62 28.08.2003. The letter dated 20.10.2009 of Punjab & Sind Bank clearly states as under:

Further, in a meeting under the aegis of IBA on 10.9.2003, the levying of prepayment charges was agreed to by the member banks.

vi) The circular letters of some of the opposite parties like Vijaya Bank, Canara Bank clearly indicate that the PPP was intended to make exit expensive for the borrowers. In case of SBI, its circular dated 13.4.2004, similarly, states that no PPP will be applicable up to pre-payment of Rs. 10 lakhs except in cases where the loan is prepaid for reasons of takeover by another bank. The circular of Canara Bank categorically states that the object of charging a PPP of 2% on the outstanding liability was to prevent migration of borrowers' accounts from one bank to another bank. Same appears to be the intention of Oriental Bank of Commerce as reflected in its circular dated 15.1.2004.

vii) These banks started charging a PPP at a rate of 2% or around 2% on all outstanding loans and no distinction was made whether the amount prepaid came from the borrower's own sources or from takeover of the loan by another bank/financial institution except in the case of SBI.

viii) In view of these aspects, it may be inferred that the ground of asset liability mis-match of as taken now before the Commission for justifying pre-payment charges was never the basis for charging a pre-payment penalty; rather the objective was to prevent the switch over or exit by the consumers to other banks. It may be noticed that the opposite parties have failed to explain the pre-payment charges on the basis of the submissions relating to asset liability mis-match. No details or data have been supplied to link or justify such levy/fee by the banks. Moreover, it can be seen that no transparency has been maintained by the answering opposite parties either in displaying or in levying pre-payment charges. Besides, it may be noted that the banks have not been reasonable in levying the said charges as is mandated by the Ministry of Finance, as discussed earlier. It may also not be out of place that some banks in their circulars have stated that prepayment charges are import to dissuade the customers from shifting to other banks. Thus, the plea of asset liability mis-match seems to be merely an after thought and is not tenable.

ix) The practice of charging PPP has not been justified by the banks on any economic working or financial data. Despite repeated queries by the DG and by the Commission, no opposite party has come forward to demonstrate the working of its cost of funds, cost of services or the working of asset liability mis-match. The replies in this regard and on this point are vague, non-specific, evasive, general and have been presented in a roundabout way.

x) The RBI which is a regulatory body for banks has insisted on 'reasonableness of such charges' and that the charging banks show that these charges are not unreasonable. Therefore, a solid, scientific and concrete material and methodology along with a rationale is needed to justify the requisite reasonableness. Thus if the rate of PPP has no nexus with the transactions and is not reasonable the same cannot be justified. The opposite parties have not satisfactorily explained that there is a reasonable basis for fixing the rate of 2% or around for charging prepayment penalty on all transactions uniformly for so many years, despite fluctuation in the rate of interest, changes in banking set up and infrastructure, shifting trends in economic policies and the changes in the banking services from time to time. In my view, while fixing the rates for charging prepayment penalty, as per the prevalent practice, the guidelines of RBI have not been adhered to.

xi) The Government of India as per its letter dated 04/05.05.2010 and thereafter, NHB in its letter of 18.10.2010 have specifically prohibited banks from charging prepayment penalty if the amount of loan is prepaid out of borrowers' own sources. This by itself suggests that charging of PPP is not justified at least in cases where the amount is prepaid out of borrower's own sources of funds. If this approach is adopted then the justification that there would be an asset liability mismatch will collapse, because irrespective of the source, the colour and tenor of money will not change and in either case the prepayments are bound to have the same effect on asset liability management or fund management.

xii) It is found that although the Finance Department of the Govt. of India and the National Housing Bank and even some of the banks like SBI have recently prohibited/stopped the practice for charging PPP if the home loan is pre-paid out of the borrower's own resources. However, these authorities have neither specifically approved charging of PPP if the loan is pre-paid out of other sources nor have they laid down any standards or specific parameters for approving such practice. These authorities have also not assigned any grounds for making a distinction between the cases where the pre-payment is made out of own resources by the borrower or from other sources. Such distinction, if made, cannot be justified by any logic. The management of liability of borrowed funds, the payment of interest and the repayment of the loan is done by the borrower. For discharging this liability and for arranging the funds for repayment, the borrower may sell his property or assets or borrow from friends or relatives or from any other source including other banks. The banks should not and cannot make any distinction between the source of prepayment funds because, in any case, their money i.e. the loan amount comes back to the banks with the prescribed rate of interest. The source of the pre-payment funds is immaterial. The liability in arranging the funds falls on the borrower. The PPP, if levied, in either case, shall be the additional burden on this liability which is bound to cause adverse effect on the borrower. Similarly, the distinction on account of source of pre-payment or repayment will not have a different impact on the management of funds and liability of the lender banks. Thus the practice of charging PPP, in view of the totality of facts and circumstances and observations made in this order cannot be even partly justified. The entire practice, is anti-competitive and violative of the provisions of Section 3(1), 3(3)(a) and 3(3)(b) of the Act. For promoting and sustaining better competition in the market and for serving and protecting the interest of the consumers, the same needs to be stopped and restrained forthwith.

xiii) There is no provision in any Act, rules & regulations or guidelines of any regulator or bank to prescribe the rate of PPP based on any sound approach. The banks are left to decide it for themselves. The banks also have adopted the uniform practice without showing a basis to justify the percentage or the rate. The French Commission in Case No. 00-D-287 September 19, 2000 on the state of competition has observed that the pre payment can be charged as laid down in the Consumer Code and any excessive charge is violation of the law. On that basis, heavy fines were imposed on the banks. The OECD in its policy guidelines of 2006 on "Competition and Regulation in Retail Banking" has said that the policy of charging switching cost should be transparent. The impugned practice of levying PPP and rates for charging the same are not as per any code, rules or regulations or based on any economic rationale. Hence, the same are anti-competitive.

xiv) The agreements entered into by the banks with the consumers are neither transparent nor specific on the issue. The consumers are not made aware of the basis for charging prepayment penalty.

xv) The main objective for charging PPP, therefore, is to check and prevent a switchover by the borrowers which in consequence, leads to preventing the new entrant banks from entering into market, debarring the consumers from availing the facility of lower rate of interest loans offered by other banks. Hence the practice of PPP as adopted by the opposite parties and as is prevalent today, is against the interests of the consumers and hinders their free mobility. It has an appreciable adverse effect on competition in the market because it is creating barriers on entry for the new entrants which offer lower rate of interest on home loans. This certainly is to the detriment of consumers and is violative of the provisions contained under Section 3(1), 3(3)(a) and 3(3)(b) of the Act.

xvi) This practice of levying a PPP by banks/ HF Cs cannot be held to be justified in view of the factors laid down in Section 19(3) of the Act. Rather, it is against consumer interests and therefore, directly against the guiding factors laid down in Section 19(3) of the Act.

xvii) It is for the RBI and NHB to consider all the relevant aspects and then to lay down proper, specific and detailed guidelines on the subject. The levy of PPP, if at all, is to be permitted then it has to be transaction based and the customers have to be informed in advance about the manner and method of calculating and working PPP in their transactions. Until, such exercise is undertaken and unless the required guidelines are prescribed, the practice of levying a PPP has to be stopped and the banks/ HF Cs have to be restrained from following or adopting this anti-competitive practice.

xviii) As has been noted elsewhere, the protection of the interest of the consumer pervades the entire scheme of the Act and the Commission cannot remain oblivious and aloof of the difficulties and plight faced by the consumers of home loans.

xix) Hence, in view of the above discussion and in view of the approach of the other domestic and foreign regulators, competition authorities, forums and courts I derive additional strength to support my findings on point Nos. (ii), (iii) and (iv) and accordingly hold that the common practice of charging a PPP by the opposite parties is anti-competitive being violative of Section 3(1), 3(3)(a) and 3(3)(b) of the Act and the same is not justifiable in terms of the guidelines of RBI, NHB and Government of India.

Point No. (v)

What order(s), if any, may be passed under the Act?

For committing the breach, in my view, the banks/HF Cs should not be penalized by imposing monetary penalty under Section 27(b) of the Act because the parties have acted upon the agreements and have carried the practice since the year 2003 and although these anti-competitive practices are being perpetrated and breach of Sections 3(1), 3(3)(a) and 3(3)(b) of the Act is continuing but it is neither possible nor desirable to quantify the monetary penalty against them in terms of Section 27(b) of the Act and to impose the same upon them. The proper remedy , in my opinion, would be to restrain them by issuing directions under Section 27(a) of the Act.

In view of the above, I am of the considered opinion that the practice of levying PPP as adopted by the opposite parties is violative of Sections 3(1), 3(3)(a) and 3(3)(b) of the Act and hence the same is void in view of the provisions contained in of Section 3(2) of the Act. I am further of the opinion that the anti-competitive practices which have an appreciable adverse affect on competition in the market and are seriously jeopardizing the interests of consumers and are causing serious damage and detriment to them should be discontinued forthwith.

Before parting with this order, I may observe that, if in view of banking regulators like RBI and NHB, it is found to be absolutely necessary to permit the financial institutions/ banks to levy a PPP for justifiable reasons, the policy guidelines for the same may be framed based upon sound parameters of economic considerations reasonableness and transparency and by duly taking into consideration the interest of consumers.

In the result and in view of the above, the following order is passed:

The practice/decision of the opposite parties of levying a PPP on foreclosure of home loans is anti-competitive and is squarely covered within the mischief of Section 3(1), 3(3)(a) and 3(3)(b) of the Act and accordingly, I direct the opposite parties to discontinue such practice forthwith and further direct them not to re-enter, directly or indirectly, into such understanding, arrangement, agreement, decision or practice in future.

With the aforesaid observations and directions, this information stands disposed of accordingly.

R. Prasad, Member (Dissenting)

In this case, complaint was received from Neeraj Malhotra, Advocate against four banks, namely:

(i) Deutsche Post Bank Home

(ii) HDFC Ltd.

(iii) HDFC Bank Ltd.

(iv) LIC Housing Finance Ltd.

The allegations against the banks:

In the present case it has been alleged by the Complainant that the above four Respondent banks have indulged in the practice of imposing pre-payment penalty charges for the foreclosure of housing loans ranging from 1 - 4 % either the entire principal amount of the loan or on the outstanding balance of the loan, if the borrowers are pre-paying the loans for closing the loan account by raising a cheaper loan (also called refinancing the loan) from another bank. This practice prevents the borrowers from switching over from one bank to another which is offering a lower rate of interest contravening thereby the provisions of Sections 3(1), 3(2), 3(3)(a) and 3(3)(b) and Section 4(1), 4(2)(a)(i) of the Competition Act, 2002.

The Commission after hearing the informant, considering the information and on perusal of the documents reached on conclusion that prima facie case exists against the four banks as mentioned in the allegations. The Commission thereafter ordered investigation by the Director General, CCI vide its order dated 10.09.2009.

The Director General Investigation Report dated 16.12.2009 stated that though the allegations were against four banks, the scope of inquiry was to be enlarged to following 16 entities:

1 LIC Housing Finance Ltd.

2 HDFC Ltd.

3 HDFC Bank Ltd.

4 Deutsche Post Bank Finance Ltd.

5 Allahabad Bank

6 Canara Bank

7 Corporation Bank

8 ICICI Bank Ltd.

9 India Bank

10 Indian Overseas Bank

11 Oriental Bank of Commerce

12 Punjab & Sind Bank

13 Punjab National Bank

14 State Bank of Hyderabad

15 State Bank of India

16 Vijaya Bank

The allegations against these banks was that in the home loan or retail market if someone wanted to prepay his loans then he has to suffer a fine which is 2% of the outstanding amount and inclusive of interest as prepayment charges. This created an impediment to exit on the borrowers and did not allow a switchover to another bank even if the said bank offered a lower rate of interest. The whole issue before the DG was that whether this practice carried out by the bank was anti-competitive or not.

The history of the home loan market is not very old in India. HDFC started giving home loans from the year 1978. Some foreign banks were also given home loans to borrowers in India. HDFC did not levy any pre-payment penalty till 1993. Around 1993 LIC Housing Finance entered the home loan market and subsequently ICICI entered the same market. From 1993 after there was a competition in the home loan market in the form of LIC Housing Finance Ltd., HDFC started the practice of levying pre-payment penalty for the foreclosure of the loans. In 1995 LIC Housing Finance also started the same practice. The Public Sector Banks entered the business of the retail home loan market at a later date and initially they were not charging penalty on the pre-payment of home loans. In the year 2003 a meeting of Indian Banking Association (IBA) was held where the issue of the levy of fines for the foreclosure of the loans was discussed. After 2003 Public Sector Banks as a consequence of the said meeting started charging fines for the pre-payment of the home loans.

Director General (DG), CCI issued notices to the 16 entities named above as well as the Indian Banking Association (IBA) and the gist of the findings of the DG are reproduced as under:

• Allegations regarding violation of Section 3(1), (2) read with Section 4(1), (2) (a) (i) were found to be untrue.

• Allegation that the entities are levying pre-payment charges on the entire loan amount and on the outstanding loan amount was found to be untrue as all the entities mentioned by the information provider are charging pre-payment penalty on the outstanding principal at the time of pre-payment and not on the entire loan amount.

• The allegation that the banks were imposing pre-payment penalty/charges was found to be true. Further, with regard to allegation for violation of Section 3(3) (a) & Section 3(3)(b) of the Act made by the information provider, violation of Section 3(3) (b) of the Act was found to be true.

• In the context of Section 19(3) of the Act, levying of pre-payment penalty creates a barrier to a new entrant in the market in a way that if the new entrant is providing competitive/lower interest rates, better services etc. the borrower of the existing banks can only avail the services of the new entrant by incurring additional cost in the form of pre-payment charges. Levy of pre-payment penalty by banks makes the exit expensive and thus acts as a deterrent to the borrower.

• It is noted from the meeting of IBA that the group of banks had come together and taken a collective decision to limit market competition and to generate fee based income. The said collective decision of bank is beneficial to the banks and on the contrary is anti consumer and anti-competitive. In view of above, levy pre-payment charges by banks violate provision of Section 19(3)(a) (c) and (d).

Summary of Defence taken by the banks and other finance companies before the D.G. the business of home loan business is as follows:

Sl. No.

Written arguments/objections submitted by banks

Name of the Banks

2

Asset Liability Management Mismatch

All the Banks

2.

Levying charges since 1993 and is not a member of IBA. Prepayment is an additional cost to the lender

HDFC Ltd.

2.

NHB also charges for prepayment if banks/HFCs want to prepay it.

HDFC Ltd., Corporation Bank, Deutsche Post Bank, Allahabad, SBH, Indian Bank, LIC HFC, Vijaya Bank

4.

Prepayment charges are only applicable if the loan is transferred to other bank

Corporation Bank, Allahabad Bank, Vijaya Bank, Canara Bank, SBH, SBI

5.

Foreclosure will generate reinvestment risk to the bank

OBC, ICICI Bank, LIC HFC, PSB, Vijaya Bank, HDFC Bank, HDFC Ltd.

6.

RBI has also endorsed that banks can generally levy charges for prepayment

HDFC Bank, Corporation Bank, Deutsche Post Bank, Allahabad Bank, HDFC Bank, SBH, Indian Bank, ICICI Bank, Vijaya Bank

7.

Allowed to be compensated under Section 73 & 74 of Indian Contract Act

Corporation Bank and Allahabad Bank

8.

Levying reasonable charges is not a barrier for new entrants

Corporation Bank, PNB, Canara Bank, OBC, ICICI Bank

9.

CCI is not to decide what is international practice

Corporation Bank, SBH

20.

Customer knows about the charges and enters into an agreement

Deutsche Post Bank, HDFC Bank, SBH, Canara Bank

21.

Violation of Sec 3(3) is not applicable and is not anti-competitive

OBC, SBI, ICICI Bank, Corporation Bank, PNB, HDFC Bank, Allahabad Bank, PSB, SBH, Canara Bank

22.

Levying charges to the customers governed by UTP not by Competition Act

Corporation Bank, SBI, ICICI

23.

Prepayment charges are not exorbitant or not usurious

ICICI Bank, OBC

24.

Additional cost on account of time lag in identifying new borrowers

ICICI Bank, IBA

25.

They started charging since IBA issued a letter to them

Indian Bank, PSB

26.

Banks have contractual obligation to pay it to their depositors but borrowers don't have

PSB

27.

Not levying Prepayment will increase the interest rates and will be borne by all the customers for the sake of few foreclosures

OBC and IBA

28.

Charging since 1995. No competition during that time and not a member of IBA

LIC HFC

29.

Reducing prepayment charges will affect depositors

SBI

20.

No prepayment charges

Axis Bank

21.

To inculcate a sense of discipline among the borrowers in availing the bank finance

IBA, Canara Bank, IOB

22.

To prevent migration to other banks the prepayment charges have been imposed

Deutsche Post Bank, Canara Bank, PNB, OBC

23.

The prepayment charges are intended to make exit expensive

Vijaya Bank

24.

Agenda of the meeting held on 10-9-2003 was on levying charges but not an agreement

PNB, SBH, Canara Bank

25.

Intense competition in market, no control over home loan market

Allahabad Bank, HDFC Bank, P&S Bank, Canara Bank

26.

No due regard to section 19 by DG

P&S bank, SBH, Canara Bank

27.

May not be beneficial for some person but beneficial for class

Allahabad bank, HDFC Ltd., SBH

28.

Admitted by DG that Section 3(1), 4(1) not applicable so the commission have jurisdiction under section 19(1)

PNB

The DG did not accept that prepayment charges are needed for asset liability management. In the opinion of the DG the banks loose money in a declining interest scenario but gain money in the interest increasing scenario. The DG was also of the view that such effects are generally factored while working out the cost of funds either on fixed interest loan or on a floating interest loan. The DG mainly relied on the meetings held by the IBA in 2003 and he has produced an extract which is reproduced as under:

...At the meeting the need for a common approach in fixing prepayment charge on loans was also suggested by some of the members. After detailed discussion, the Committee, while fully appreciating the market dynamics decided that a suitable communication be sent to member banks bringing out the view points expressed by the members so that the member banks could take a decision on levy of commitment charges and prepayment charges.... (IBA Circular dated 10.09.2003)

The DG has also taken into account the submission of replies of banks whereas banks have stated that the reasons for levied prepayment charges were the following factors:

i) To prevent volatility and speculation in the home loan market.

(ii) To dissuade the borrowers from shifting to other banks

(iii) To strengthen Asset Management System

(iv) To prevent migration of borrower accounts from one bank to other

(v) The levy of prepayment was to make exit expensive.

The DG summarized the entire practices as under:

(i) The Practice has been elaborated in subsequent paras.

(ii) Origin of this practice is traced to the home finance companies somewhere around 1993 or so to discourage migration of customers to other lenders.

(iii) The justifications given by different lenders have been discussed in the body of this letter but these are not correct justifications. The correct justification is to kill competition, prevent migration of customer to other banks and enhance fee based income.

(iv) RBI is the regulatory body. It has issued general guidelines which discourage such practices. However, there is no enforcement of its direction and banks have been left free to charge different service charges within the broad parameters of regulatory guidelines issued by RBI. Thus, these are simply holy homilies without any impact.

(v) In once case where pre-payment penalty was charged, it has been upheld as wrong in the case of State Bank of India.

(vi) International practice is, broadly, in favour of not having any exit load on the borrower whether called by early redemption charge, pre-payment penalty or any other name.

(vii) As regards the violations under the Competition Act, 2002, it may be stated that the origin of this practice are rooted in preventing the customer from trying to get better bargain, disciplining the borrower and kill competition. In a way this practice limits/controls supply of funds in the loan market and, therefore, falls within the provisions of Section 3(3) of Competition Act, 2002.

After the report of the DG was received, notices were issued by the Commission to all the 16 Banks and finance companies and the IBA to give details of their objections against the findings of the DG that there was a contravention of the Competition Act. A summary of arguments taken and issues raised are reproduced as under:

Replies/ Observations by Respondents:

(i) Indian Banks' Association

• RBI is the regulator of banking industry in India, and the practice of charging prepayment penalty is 'duly approved' by RBI

• The DG or CCI do not have jurisdiction in the matter.

• Prepayment penalty is charged under the terms of contract signed by the borrower. Any remedy lies with the Civil Court.

• The DG's report has tested the practice on rule of reason and found it reasonable

• The DG's report has not provided any evidence to suggest that prepayment penalty is anti competitive

• Prepayment penalty is ultimately in the interest of the consumers at large.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• Prepayment of loans is dependent on interest rates (cyclical factors) and rising income levels (structural factors). The DG's finding that prepayment penalty creates a demand side constraint is baseless.

• Banks apply upward interest rate changes to new customers only and not to existing customers. Therefore, prepayment penalty is welfare inducing and helps consumers.

• PPC is part of ALM exercise by lenders.

• 1-2% of PPC is not usurious, otherwise it would have been declared illegal by Courts of Law.

• Reference to US and Taiwan markets is erroneous because of different market situations.

• If the practice of charging PPC by NHB is reasonable, it should be same if charged by other retail lenders.

(ii) State Bank of India

• PPC is not ex-facie anti-competitive but has useful economic purpose

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has not gathered any data to support the view that the practice of levying prepayment penalty limits or controls provision of financial services.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• DG has not given due regard to Sec 19(3) of the Competition Act, before concluding that PPC has adverse effect on competition.

• There is no entry barrier in the loans market.

• Banks have to perform ALM function for which PPC is a tool.

• The Commission cannot side with one class of consumers who are benefited by banning PPC.

• The Commission has no jurisdiction in the matter, because PPC at best can be termed at unfair trade practice.

• PPC may be harmful to borrowers but is beneficial to depositors.

• If some individuals pay PPC for their adventurism, it cannot be said that majority of the consumers is adversely affected.

(iii) Deutsche Post bank

• The bank loses interest for the remaining period when a borrower pre pays his loan

• The unexpected inflow of funds takes time to lend elsewhere

• Prepayment charge is collected to compensate opportunity loss due to prepayment of loan

• NHB also charges prepayment levy

• RBI guidelines permit levy of such charges

• Prepayment charges is levied to prevent volatility of customer

• 2-2% cannot be termed usurious

• The Supreme Court Case only says that transfer of loan amount cannot be termed as prepayment

• In US the law does not restrict prepayment penalty

• In UK mortgage companies may charge early settlement fee

• In Australia too, lenders impose early discharge fee

(iv) LIC Housing Finance

• Prepayment occurs mostly in falling interest rate scenario, whereby the lender is at loss due to pre payment of loan.

• PPC has not prevented new entry into the market.

• Growth of the industry proves that PPC has not acted against the industry.

• LIC housing and NHB, both are government owned and therefore should be treated in same fashion on the issue of PPC.

• LIC Housing borrows long term unlike retail banks and therefore has comparatively heavy ALM costs.

• Prepayment does not occur during increasing interest rate scenario.

• US and Taiwan may not be appropriate examples to follow for PPC.

• Removing PPC may lead to crisis in the loan market.

(v) Indian Bank

• There is no agreement among banks as per Sec 3 (3) of the Act

• Prepayment charges are levied to compensate for likely loss due to customer availing lower rate of interest from other lender

• If a term loan is repaid then bank cannot repay the term deposit

• Prepayment charge is taken only when borrowers shifts to another lender ''for his own gain''

• Borrowers enter into the loan agreement knowing all the charges ab initio, and therefore, expected to respect the agreement.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• Borrowers cannot be allowed to wriggle out of contract terms.

• Banks levy pre payment penalty to protect their business

• Prepayment charge is a business compulsion and charged for breach of contract

• Borrower cannot be allowed to walk away from a contract for his own gain and at a loss to the lender

• Prepayment penalty acts as a safeguard against unfair trade practices and ''competitions''

• No victim of pre payment charge has been cited in DG report

• No bank has been denied entry into the business or suffered from any adverse consequences of pre payment penalty being charged by existing lenders

(vi) HDFC Ltd.

• Prepayment penalty does not increase the effective interest rate in a loan

• Since HDFC is not a member of IBA nor attended their meeting, it cannot be said to be party to any agreement among the IBA members. Therefore, Sec 3(3) of the Competition Act does not apply to it.

• HDFC was the first to start housing finance in India and also to levy prepayment charge in 1993.

• Prepayment charges are welfare enhancing

• Prepayment charges are imposed to recover several costs like reinvestment cost, lower credit quality, administrative costs and reduced predictability of returns

• As per research, prepayment penalty reduces effective price to borrowers

• The DG-Competition Commission agrees in his report that prepayment is a cost to the lender

• The DG report does not have evidence or economic analysis to prove that imposition of prepayment charge limits or controls supply of home loans

• The home loans market is highly competitive.

• PPC has not deterred new players from entering the market.

• PPC stops unrestricted refinance by borrowers.

• Borrowers who prepay are net gainers even after paying PPC.

• PPC is the reasonable estimate of damages payable for breach of contract under the contract act.

• Borrowers who do not want to pay PPC can go to other lender like Axis Bank who do not charge PPC.

• PPC charged by HDFC is not anti competitive in the same manner that PPC charged by NHB is not anti competitive.

• RBI does not ban PPC.

• The DG report misses many housing finance companies.

• The DG has wrongly concluded that US authorities have recommended banning of PPC.

• The analogy with Taiwan market is erroneous.

• HDFC applies differential pricing of loan products.

(vii) HDFC Bank

• Prepayment penalty is like notice money charged by landlords

• Prepayment penalty is levied to cover expenses incurred on sanction, booking of loan, maintenance and ALM

• RBI is the regulator of banking industry as per Banking Regulations Act, 1949 and as such its policy is not subject to interference by a court or tribunal or by CCI. Only RBI can decide about foreclosure charges levied by banks. CCI has no jurisdiction in the matter.

• The banking market is competitive and no player can levy excessive charges.

• Under Section 21A of the Banking Regulations Act, 1949, rates of interest charged by banking companies will not be subject to scrutiny by courts.

• RBI is aware of the practice of PPC being levied by banks.

• PPC is levied as per terms of contract signed by customers who are well aware of the implications.

• Internationally there is a practice of charging foreclosure charges.

• PPC is the compensation to the bank that is losing the customer to another lender.

• All other banks and F Is should also be issued notice by the CCI.

• (viii) Oriental Bank of Commerce

• The DG has applied the rule of reason and then erroneously found the practice of charging PPC as anti competitive

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• There is no evidence to support the finding that PPC influences entry decision.

• Prepayment of loans is dependent on interest rates (cyclical factors) and rising income levels (structural factors). The DG's finding that prepayment penalty creates a demand side constraint is baseless.

• PPC enhances certainty of cash flows from borrowers and therefore enhances consumer welfare.

• PPC is a tool for ALM by banks.

• 2-2% of PPC is not usurious, otherwise it would have been declared illegal by Courts of Law. Even if PPC is usurious, the Consumer fora are the right bodies to be approached.

• The DG has to keep in mind 'balance of interest' of all consumers.

(ix) State Bank of Hyderabad

• Banks are left with excess funds in case of prepayment of loans which may not be deployed profitably.

• If there is no PPC, there will be double benefit to the borrowers, because they anyway seek low rates of interest at the start.

• PPC is in interest of depositors.

• PPC is mentioned in the contract, therefore there is no effective increase in interest rate.

• SBH has some loan schemes where no PPC is charged.

• There is no question of abuse of dominance because SBH has 1.5% business of SC Bs.

• There is no collective dominance in banking industry, otherwise the interest rates would have been higher than the current rates.

• As per law, transactions cannot be challenged for high interest rates being charged by banks.

• Banks have not formed any agreement to charge PPC.

• International practice appears to be in favour of PPC and World Bank etc levy PPC.

• Once a borrower has accepted a loan on certain terms, it is not open to him later to chose lower interest rate in the market.

• PPC cannot be termed illegal per se merely because it does not appeal to some borrowers.

• PPC is only restrictive or unfair trade practice and therefore beyond the jurisdiction of CCI.

• If PPC is to be prohibited for usury, then only consumer courts would have jurisdiction to do so.

• The Commission should refer the matter to RBI and Government of India for appropriate regulations.

• PPC is in the form of liquidated damages in a contract term.

(x) Canara Bank

• Section 3(3) is not applicable because the agreement is not between persons in identical / similar trade.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• PPC does not influence new entrants and there is virtually no entry barrier in housing loan market.

• PPC may be against the interest of borrowers but keeping the balance of interest rule in mind it is beneficial to the depositors.

• PPC is only restrictive or unfair trade practice and therefore beyond the jurisdiction of CCI.

(xi) Indian Overseas Bank

• PPC creates healthy competition in the trade practices of banking industry.

• PPC has been tested on the rule of reasonableness by the DG and he has found the practice to be economically reasonable. The DG also found no dominance in the industry. Therefore there is no case made out against the banks.

• The DG has not given any evidence to establish that PPC is ex facie anti competitive.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has not gathered any data or evidence to establish that PPC is anti competitive practice.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• There are no entry barriers in the banking industry and also the market has been growing at a very high rate. This proves that PPC has not limited or controlled the availability of home loan products.

• The DG has not evaluated the practice of PPC on the factors mentioned Under Section 19 of the Competition Act, 2002.

• Since there have been many new entrants in the market, it is not true that the practice of PPC has influenced the decision of new entry into the market.

• Prepayment of loans is dependent on interest rates (cyclical factors) and rising income levels (structural factors). The DG's finding that prepayment penalty creates a demand side constraint is baseless.

• When interest rate was rising in the market, existing borrowers were paying reasonably flat interest rates and were spared of rate shocks. Therefore PPC is welfare inducing.

• Since securitization is not common in Indian market, PPC is a tool employed by lenders to increase certainty of cash inflows.

• PPC is an ALM tool to manage reinvestment risk. That is the reason that RBI and the government did not frown upon PPC.

• 2-2% of PPC is not usurious, otherwise it would have been declared illegal by Courts of Law.

• PPC cannot be termed illegal per se merely because it does not appeal to some borrowers.

• The DG drawing analogy from US market is erroneous because the loan products in the Indian market, unlike US, are simple.

• The DG has erred to conclude that PPC is banned in the US.

• PPC is banned in UK because major chunk of the market is floating rate.

• Taiwanese example of banning PPC is of no relevance to the Indian scenario.

• IBA and economic thought across the world supports regulation of PPC rather than complete ban.

• PPC is good for the depositors and the stake holders of banks. It may come under restrictive or unfair price terms and therefore beyond jurisdiction of CCI.

• If PPC is to be prohibited for usury, then only consumer courts would have jurisdiction to do so.

• Cases cited by the DG are irrelevant in the matter.

(xii) Vijaya Bank

• PPC allows banks to keep interest rates stable for existing borrowers and increase it to new customers; therefore the practice has given discernible benefits to the customers.

• PPC is an ALM tool to manage reinvestment risk. That is the reason that RBI and the government did not frown upon PPC.

• The DG has justified levy of PPC by NHB, but found it to be anti competitive in case of retail lenders.

• 2-2% PPC is not usurious.

• PPC charged by banks is within the directive and guidelines of RBI and the Government

• The DG's finding that there is collective dominance in the banking industry is incorrect because there is intense competition in the market.

• The market is well regulated by several agencies like RBI, Government and NHB whose mandate is protection of public interest.

• Since all banks are charging PPC, the Commission should not question it, but rather look into the implications. The RBI is the regulator for banking and it alone should decide policy about banks.

• PPC is good for the depositors and the stake holders of banks. It may come under restrictive or unfair price terms and therefore beyond jurisdiction of CCI.

• The DG has not gathered any data or evidence to establish that PPC is anti competitive practice.

• The DG has not evaluated the practice of PPC on the factors mentioned Under Section 19 of the Competition Act, 2002.

• All banks/HF Cs are posting high profits so there is no question of adverse effect of PPC on competition.

(xiii) ICICI Bank

• PPC is required for Asset Liability Management of funds.

• PPC charged by ICICI Bank is not usurious.

• RBI directs that banks should be transparent in declaring the charges to the customer, and ICICI bank does that by taking acknowledgement of the customer for all terms and conditions in loan documents.

• Borrowers are deemed to be aware of all additional charges.

• Interest rates and charges of banks are not subject to judicial review.

• Only RBI can decide if any rate or charge is usurious or not The apex court has refrained from determining the legality of PPC.

• ICICI has been levying PPC since 2001 which is much before the IBA meeting.

• There is high growth and no entry barrier in the sector. This goes to prove that PPC has no correlation to market entry.

• PPC charged by banks is within the directive and guidelines of RBI and the Government The DG's finding that there is collective dominance in the banking industry is incorrect because there is intense competition in the market.

(xiv) Allahabad Bank

• PPC is levied as per contract terms and these terms are not against public policy.

• PPC is the damage payable by a party breaching a contract.

• PPC is levied to mitigate loss to lender due to prepayment of loan.

• PPC is nominal and does not restrict migration of borrowers. The DG has not quoted any instance for this.

• If NHB is justified in levying PPC, so are other banks.

• Cases cited by DG are of no assistance in this case.

• PPC has been tested on the rule of reasonableness by the DG and he has found the practice to be economically reasonable. The DG also found no dominance in the industry. Therefore there is no case made out against the banks.

• The DG has not given any evidence to establish that PPC is ex facie anti competitive.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services and is anti competitive.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• Since there have been many new entrants in the market, it is not true that the practice of PPC has influenced the decision of new entry into the market.

• There are no entry barriers in the banking industry and also the market has been growing at a very high rate. This proves that PPC has not limited or controlled the availability of home loan products.

• The DG has not evaluated the practice of PPC on the factors mentioned Under Section 19 of the Competition Act, 2002.

• Prepayment of loans is dependent on interest rates (cyclical factors) and rising income levels (structural factors). The DG's finding that prepayment penalty creates a demand side constraint is baseless.

• Banks are able to raise low cost funds by securitizing instruments that have certainty of cash flow (i.e. prepayment penalty). Therefore,

• PPC enhances consumer welfare. Banning PPC will have 'appreciable adverse effect on consumers' (sic!) PPC is an ALM tool to manage reinvestment risk. That is the reason that RBI and the government did not frown upon PPC.

• 2-2% of PPC is not usurious, otherwise it would have been declared illegal by Courts of Law.

• The DG has to keep in mind 'balance of interest' of all consumers.

• Indian home loan market is diametrically opposite to the US market and therefore its example cannot be drawn. Anyway, US authorities have not favoured ban on PPC but rather to regulate the level of charges and fees.

• PPC is banned in UK because major chunk of the market is floating rate.

• Taiwanese example of banning PPC is of no relevance to the Indian scenario.

• IBA and economic thought across the world supports regulation of PPC rather than complete ban.

• PPC is good for the depositors and the stake holders of banks. It may come under restrictive or unfair price terms and therefore beyond jurisdiction of CCI.

• If PPC is to be prohibited for usury, then only consumer courts would have jurisdiction to do so.

(xv) Punjab National Bank

• RBI is the regulator of banking industry in India, and the practice of charging prepayment penalty is 'permitted' by RBI.

• Banks levy prepayment charges as per their genuine cost considerations.

• Letter of the IBA is not the basis of charging PPC and banks started levying the PPC at different times and different rates with different condidtions attached.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services.

• PPC is not ex-facie anti-competitive but has useful economic purpose

• Practice of charging PPC does not have predictable and pernicious anti competitive effect.

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• DG has failed to give due regard to factors enumerated in 19 (3) to declare the practice as per se illegal.

• There is no entry barrier in the Housing Finance Market and PPC does not influence the decisions of potential new entrants to enter the market.

• Prepayment decisions are not influenced by the Prepayment penalties.

• Prepayment penalty is welfare inducing and benefits consumers Prepayment by the borrower generates reinvestment risk for the bank PPC is a tool for ALM by banks.

• The law in the united states does not ban charges and fees. Also there is no ban on the practice of payment penalty in EU.

• Competition act not applicable when practice is good for one class of consumer and not directly beneficial for another class.

• If PPC is to be prohibited for usury, then only consumer courts would have jurisdiction to do so.

• No concerted action by different banks / financial institutions

(xvi) Punjab and Sind Bank

• Since the DG report makes no reference to P&S bank specifically and because it charges a nominal PPC of 1%, it may be kept out of any enquiry by the CCI.

• Since PPC is part of sanction letter the borrower consciously accepts the terms.

• CCI has no jurisdiction in the matter as RBI is the regulator for banks.

• The DG's report gives no reason to establish that PPC is anti competitive practice.

• Banks do not decide fixing of their prices / interest rates or other charges under the umbrella of IBA and there is no cartel.

• Practice of charging PPC does not have predictable and pernicious anti competitive effect.

• PPC is not anti competitive by the application of rule of reason and cannot be held as inherently anti competitive by the applying per se rule.

• PPC is not ex-facie anti-competitive but has useful economic purpose

• There is no evidence to prove market dominance and therefore not fit to be tried under MRTP Act.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services (home loan products).

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• DG has failed to give due regard to factors enumerated in 19(3) to declare the practice as per se illegal.

• No evidence as to how the levy of PPC has in any way deterred the new entrants in the market and foreclosed the competition.

• Practice of levying prepayment penalty is welfare inducing and has discernible benefits. There is economic utility attached to the levy of PPC.

• Prepayment by the borrower generates reinvestment risk for the bank PPC is a tool for ALM by banks.

• Any practice cannot be termed illegal if it is beneficial to one class of consumers and not to other.

• PPC is beyond the jurisdiction of the CCI because it is beneficial to one class of consumers (i.e. depositors of banks) and accordingly subject of Consumer Courts.

(xvii) Corporation Bank

• The rationale for charging the PPC is to mitigate loss caused by such prepayment and ALM.

• Prepayment charges are nominal, does not discourage competition and shifting of consumers from one bank to other.

• No consideration has been given to whether recommendation on financial regulatory reforms in USA and Taiwan were accepted or not.

• DG failed to assign any reason as to inapplicability of the policy adopted by National Housing Bank on Prepayment penalty to other banks.

• The case Dr. Usha Vaid v. State Bank of India can not be basis of Investigation since prepayment charges were not part of the agreement.

• PPC is not exfacie anti competitive and serve useful economic purpose.

• So far as IBA circular dated 10/09/2003 is concerned, only economic consequences and not language and form of agreements can form basis of anti-competition investigation.

• Practice of charging PPC does not have predictable and pernicious anti competitive effect.

• The DG has failed to prove how the practice of levying prepayment penalty limits or controls provision of financial services (home loan products).

• Anti competitive effect of any practice can be presumed only if the relevant market is monopoly or oligopoly, which is not the case here.

• DG has failed to give due regard to factors enumerated in 19 (3) to declare the practice as per se illegal.

• PPC does not create entry barriers for the new entrants.

• PPC is levied to meet the reinvestment risk incurred by the bank and bank manages the risk through the process known as ALM.

• DG has failed to consider the totality of economic factors and interest of all classes of consumers

• If PPC is to be prohibited for usury, then only consumer courts would have jurisdiction to do so.

• PPC may be akin to restrictive or unfair trade practice and therefore beyond the jurisdiction of CCI.

The perusal of the above would show common issues raised in most of the replies which are as follows:

i) Regulatory Purview

Since RBI is the banking regulator, CCI does not have jurisdiction in the matter.

(IBA, HDFC Bank, Vijaya Bank, ICICI Bank, PNB, P&S Bank)

ii) Legal Jurisdiction

PPC can be associated with unfair or restrictive trade practices and such practices can be challenged in Consumer Courts and are beyond the jurisdiction of CCI.

(SBI, SBH, Canara Bank, Vijaya Bank)

iii) IBA meeting has no consequence

The DG has wrongly relied on the language of the IBA circular dated 10 Sep 03 and internal circular of Banks to interpret that the intention has been to discipline the customer and to increase income. The DG concludes that the language of the said circular is monopolistic and that PPC is per se anti competitive. The DG should not have relied on the language and form of agreements but should have rather looked for economic consequences in has investigation.

(IBA, SBI, Indian Bank, OBC, IOB, Canara Bank, Allahabad Bank, Punjab & Sind Bank, Corporation Bank)

iv) PPC is a tool for asset liability management

When a borrower prepays a loan the Bank loses all future interest and also has to find new avenues to invest the fund received. This causes mismatch in the asset and liability tenure. Therefore, Banks charged PPC to compensate for the resultant loss.

(IBA, SBI, Deutsche Post bank , HDFC Bank, OBC, IOB, Vijaya Bank, Allahabad Bank, Punjab & Sind Bank, Corporation Bank, PNB)

v) DG has not gathered evidence to establish that PPC is anti-competitive practice

The DG has failed to produce evidence/data to establish that imposition of PPC limits or controls supply of home loans in any manner.

(IBA, SBI, HDFC Ltd, OBC, IOB, Vijaya Bank, Allahabad Bank, Punjab & Sind Bank, Corporation Bank, PNB)

vi) PPC has economic benefits

PPC enhances certainty of cash flow from borrowers and reduces volatility of interest rates, therefore, it enhances consumer welfare.

(IBA, SBI, HDFC Ltd, OBC, IOB, Vijaya Bank, Punjab & Sind Bank, Corporation Bank, PNB)

vii) PPC is a tool to manage reinvestment risk

Banks may suffer loss when a loan is paid before its tenure because they may not find equally profitable avenues to invest at the material time. To compensate for such probable loss they levy charge on the pre payment.

(PNB, Corporation Bank, Allahabad Bank, Punjab & Sind Bank)

viii) US, Taiwan and UK rules are irrelevant in the matter

US market has complex products and it has recently suffered crisis due to the profligacy of the players. On the other hand UK loans are mostly floating rate and therefore not comparable to the Indian situation. The example of Taiwan is also not relevant.

(IBA, LIC Housing, HDFC Ltd., IOB, Allahabad Bank)

ix) PPC is levied as per terms of the contract signed by the borrower; therefore CCI should not interfere in the Contract Act.

PPC is levied as per terms of the agreement between borrower and the lender and therefore any dispute under the Act is under the purview of Courts. CCI has no jurisdiction in the matter.

(IBA, LIC Housing, HDFC Ltd., IOB, Allahabad Bank)

x) The market is not monopoly/ oligopoly

In order to presume that a practice has anti competitive effects, the relevant market should be monopoly or oligopoly. Since there is no evidence in this regard, PPC cannot be presumed to be anti competitive.

(IBA, SBI, Canara Bank, OBC, PNB, Corporation Bank, IOB, Allahabad Bank)

xi) PPC does not cause demand constraints

Loans are prepaid due to cyclical factors (interest rates) or structural factors (rising income). DG's finding that PPC gives rise to demand constraints in the market, is baseless.

(IBA, OBC, IOB, Allahabad Bank)

xii) PPC is not usurious

PPC of 1-2% cannot be termed usurious, otherwise it would have been declared illegal by Courts.

(IBA, SBH, PNB, Corporation Bank, Deutsche Post bank, OBC, IOB, Vijaya Bank, Allahabad Bank)

xiii) If NHB is justified in charging PPC, so are other retail lenders

The DG has justified the practice of charging PPC by NHB. Other retail lenders are justified in similar manner to charge PPC.

(IBA, LIC Housing, Deutsche Post bank, HDFC Ltd., Vijaya Bank, Allahabad Bank)

xiv) The DG has not considered factors mentioned Under Section 19 of Competition Act The DG has failed to test the practice of levying PPC by lenders, with due regard to factors mentioned in Section 19 of the Competition Act.

(SBI, Vijaya Bank, Allahabad Bank, PNB, Punjab & Sind Bank, IOB)

xv) PPC may be harmful to borrowers but it is beneficial to the depositors and other stake holders of the banks

(SBI, Canara Bank, Allahabad Bank, PNB, Punjab & Sind Bank)

xvi) The court cases cited by the DG are not relevant in the matter The apex court has left the question of legality of PPC, open.

(Deutshce Post bank, Allahabad Bank, PNB, Punjab & Sind Bank)

xvii) The Commission has to keep balance of interest of all class of consumers PPC may be harmful to borrowers but it is in the interest of depositors and CCI should not favour one class of consumers in the matter.

(SBI, OBC, Allahabad Bank)

xviii) The market has grown at very high rate which proves that PPC is no way detrimental to the industry. PPC has not deterred new entry in to the market.

(LIC Housing Finance, SBI, HDFC Ltd, IOB, ICICI Bank, Allahabad Bank)

xix) Miscellaneous ?

Banks apply upward interest rate changes to new customers only and not to existing customers. Therefore, prepayment penalty is welfare inducing and helps consumers. - (IBA)

• Some individual pay PPC for their adventurism and it cannot be said that majority of consumer is adversely affected. - (SBI)

• PPC is levied to prevent volatility of customer. RBI permits levy of such charges. In Australia too lenders impose early discharge fee. - (Deutsche Post bank)

• Removing PPC may lead to crises in the market. Loans are prepaid mostly in falling interest rate scenario- (LIC Housing Finance)

• Borrower should not be allowed to wriggle out of contract terms. PPC is a safe guard against competition and unfair trade practices. Banks levy PPC to protect their business.- (Indian Bank)

• HDFC started levying the PPC much before the IBA meeting. PPC reduces effective price to borrowers. Borrowers who switch are net gainers even after paying PPC. Those who do not want to pay PPC can go to other lenders like Axis Bank. RBI does not ban PPC. DG report misses many finance companies. HDFC applies differential pricing of loan - (HDFC Ltd)

• PPC is the compensation to the bank that loses its customer to another lender. Under Banking Regulations Act 1949, interest rate charged by banks is not subject to scrutiny by courts- (HDFC Bank)

• There is no collective dominance in the banking industry otherwise interest rate would not have been so low. World Bank too charges PPC. Once a borrower has accepted a loan on certain terms it is not open to him to later choose lower interest rate in the market. The Commission should refer the matter to RBI or Government of India - (SBH)

• Section 3(3) is not applicable in the case because there is no agreement between persons in identical/ similar trade- (Canara Bank)

• PPC creates healthy competition in the banking industry- (IOB)

• All banks and HF Cs are posting high profits; therefore there is no question of PPC having adverse effect on competition- (Vijaya Bank)

• Borrowers are deemed to be aware of all additional charges. PPC is within the guidelines of RBI and Government of India.- (ICICI Bank)

• Banning PPC will have 'appreciable adverse effect on consumer' (sic!). - (Allahabad Bank)

• The decision to prepay is not influenced by the PPC. Competition Act is not applicable when the practice is good for one class of consumers and not directly beneficial for another class. - (PNB)

• Since P & S bank charges only 1% as PPC, it may be kept out of the purview of inquiry. - (P & S Bank)

After discussing the facts of the case, it is necessary to examine the provisions of the Competition Act. The preamble to the Act talks about:

(i) Establishment of a Commission to prevent practices having adverse effect on competition.

(ii) To promote and sustain competition in markets.

(iii) To protect the interests of consumers.

(iv) To ensure freedom of trade carried on by the other participants in markets in India

(v) Matters connected therewith or incidental thereto.

Section 18 of the Competition Act defines the duty of the Commission which are:

(i) to eliminate practices having an adverse effect on competition.

(ii) Promote and sustain competition

(iii) Protect the interests of consumers

(iv) Ensure freedom of trade carried on by the other participants in markets in India

Competition itself has not been defined in the Act. The reason could be that by defining Competition the meaning of Competition is restricted. Therefore competition has to be given a wide meaning. The purpose of competition is the economic development of the country. Competition leads to higher productivity innovation, cheaper prices, freedom of choice and decreasing switching costs. Therefore practices which lead to decrease in productivity, innovation, higher prices, decrease of the freedom of choice and increasing switching costs may be classified as anti competitive or causing adverse effect on competition. It is the duty of the Commission to ensure freedom of trade, eliminate anticompetitive practices, promote and sustain competition and protect the interests of the consumers.

Section 3 of the Competition Act is reproduced and is as follows:

Anti-competitive agreements

(1) No enterprise or association of enterprise or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

(2) Any agreement entered into in contravention of the provisions contained in Sub-section (1) shall be void.

(3) Any agreement entered into between enterprises or associations of enterprises or persons or association of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which -

(a) directly or indirectly determines purchase or sale prices;

(b) limits or controls production, supply, markets, technical development, investment or provision of services;

(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

(d) directly or indirectly results in bid rigging or collusive bidding.

Shall be presumed to have an appreciable adverse effect on competition:

Provided that nothing contained in this Sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.

Explanation - For the purposes of this Sub-section, "bid rigging" means any agreement, between enterprises or persons referred to in Sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply , distribution, storage, sale or price of , or trade in goods or provision of services, including

(a) tie-in arrangement;

(b) exclusive supply agreement;

(c) exclusive distribution agreement;

(d) refusal to deal;

(e) resale price maintenance

shall be an agreement in contravention of Sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.

Explanation - For the purposes of this Sub-section -

(a) "tie-in arrangement" includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;

(b) "exclusive supply agreement" includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person;

(c) "exclusive distribution agreement" includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods;

(d) "refusal to deal" includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought;

(e) "resale price maintenance" includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

The section consists of various parts. Sub-section (1) of Section 3 has wide ramifications. An agreement which causes appreciable adverse effect on competition in India in respect of production, supply, acquisition, control of goods and services is void as stated in Sub-section (2) of Section 3 of the Act. Sections 3(1) and 3(2) do not deal only with the supply side of the market. A market works on the principle of demand and supply. The assumption here is that a consumer would make a decision to purchase or sell in a rational manner so as to maximize gains to it. If an enterprise deals with an individual by entering into an agreement which causes an adverse effect to competition in India would be hit by Sections 3(1) and 3(2) of the Act. Any other view would be a narrow view and not authorised by the Act.

Section 3(3) of the Act is based on the concept of presumption. It is envisaged that if the factors as enumerated Clauses (a), (b), (c) and (d) of Sections 3(3) exist then it would be presumed that there is an appreciable adverse effect on competition. No presumption is absolute as presumption can be rebutted. In the main Section 3(3) of the Act, the behaviour of the persons or enterprises which are covered are agreements, practices carried on and decisions taken. Another aspect to be looked into is that the enterprises are engaged in similar trade of goods or provision of services.

Section 3(4) talks of an agreement between persons in a production chain in different markets in respect of production, supply, distribution, storage, sale or price of or trade in goods or provision of services. The Section has an inclusive definition which includes tie in arrangement, exclusive supply agreement, refusal to deal, exclusive distribution agreement and resale price maintenance. These five situations are not exhaustive and could include other situations. In any case exclusive supply agreement means an agreement which restricts the customer from buying goods or services from any other buyer. Only issue to be examined in Section 3(4) is whether on the facts and circumstances of the case there is an adverse effect on competition.

The next salient feature to be seen as to how the Act should operate. Under Section 16 of the Act, it is the duty of the Director General to assist the Commission to fulfill its obligation under Section 18 of the Act. It is not for the Commission to sit on judgment over the findings of the D.G. If the D.G. has not carried out proper investigation, the Commission can direct the D.G. to investigate the case on the issues to be directed by the D.G. It can inquire itself also. This is the scheme under Section 26(7) of the Act.

The procedure for inquiry has been laid down in Section 26 of the Competition Act. On the basis of own information or from any other source, the Commission can form an opinion that prima facie case exists it can direct the DG to carry out an investigation under the Competition Act [Section 26(1) of the Act]. If on the basis of information, the Commission forms a prima facie opinion that no case exists, it can close the case [Section 26(2)]. An appeal to the COMPAT lies against the Commission. Under Section 26(3) of the Act, the D.G. is required to submit his report to the Commission within the period specified. Under Section 26(4), the report of the D.G. is required to be forwarded to the parties concerned. Section 26(5) envisages a situation where the D.G. has not found a contravention of the Act. In such a case, the Commission is required to give a notice to all the parties and hear them. Under Section 26(6) of the Act, if the Commission agrees with the findings of the D.G. it can close the case by passing an order. This order under Section 26(6) is appeal able. Section 26(8) talks of a situation where D.G. has found a contravention of the Act but the Commission finds that more enquiries are needed, it can carry out enquiries. No order dropping the case or penalizing the concerned parties can be passed under Section 26(8) of the Act because the section does not talk of an order as has been mentioned in Sections 26(2) and 26(6) of the Act. It is implied in the Act when the Commission has formed a prima facie opinion under Section 26(1) of the Act and the D.G. has confirmed this prima facie view by investigation, the Commission cannot drop the proceedings. If it drops the proceedings it amounts to a recall of its orders passed under Section 26(1) of the Act. Further the legislative intent is clear. As discussed earlier no order under Section 26(8) can be passed. If the intention of the legislature was to drop proceeding under Section 26(8) then it should have mentioned that an order was required to be passed and the said order would have been appeal able. In such a case, the Commission has to accept the recommendations of the D.G. though it has discretion to levy penalty of different types under Section 27 of the Act.

We also have to examine the economic considerations for the levy of penalty charged by the banks for the foreclosure of loans. We have to examine the economies of treatment of this phenomena of penalty for the foreclosure of loans in other countries. We also have to examine the home loan market in India and its contribution to the Indian economy and vice versa. We also have to examine whether the banks/financial companies are losers or gainers if their customers prepay their loans.

In India, the shortage of homes for living is approximately 70 million. The economy in India was liberalized in 1991. Home loan concept was introduced in India and tax breaks were introduced for home loan takers. After the opening of the economy, the G.D.P. in India increased substantially and from 2003 to 2008, the G.D.P. growth was approx. 8.9%. Due to liberalization of the home loan market, increase in disposable income, the requirement for home loans increased and the home loan market grew by 43% between 2000 and 2005. Many new banks and finance companies entered the home loan market. The market is very big and demand is so high that many more enterprises want to enter the market.

An economy would grow in the short run if consumer spending increases. If consumer spending increases the savings rate would go down. Savings rate increase in the long run may be beneficial but consumption spending in the short run is beneficial for the economy. Thus it is necessary to put surplus cash in the hands of the consumers. But the banks by having a prepayment fine on the consumers is decreasing the cash availability. Further, a cap has been put on the banks and other companies as far as housing loan is concerned. If a filip is given to housing by having cheap property prices and cheap loans, the housing industry would receive a boost. This in turn would lead to higher employment, higher industrial growth, higher growth of person income and increase of G.D.P.

It is therefore necessary that as India faces shortage of houses, the home loan market should be expanded. Mobility in the market for the customer should be encouraged. Competition in home loan banking is important in order to ensure an efficient banking industry and should not be viewed as dangerous to the banking sector. In fact in Norway mortgages are the main source of income for customers constituting 75% of the total income. In India as well as in various countries, the banks charge customers for terminating services. This reduces the mobility of customers. The ability of the customers to switch banks helps the competitors the benefits of a competitive banking market. Any obstacle which reduces customers' ability to switch banks will correspondingly reduce the competitive pressure on banks. High switching cost may result in increased bank market power and enable the banks to extract extra rent from the customers. High switching costs may also constitute barriers to entry as they make it harder for new entrants to attract customers and hence discourage new market entry. Further high switching cost may discourage product innovation, as customers would be reluctant to switch to new products and services.

The European Commission carried out a study of retail banking. Even the EFTA Authority had carried out a study of retail banking in the EFTA countries. The European Commission found potential competition concerns and consumer harm in some of the areas such as list of coordinated behaviour in the banks to the detriment of customer mobility through a non-transparent treatment of certain products such as mortgages. There are some economists who consider that banks form a big cartel but most of the economists are not of this view. The European Commission observed that the mortgages generated largest share of income in retail banking in European banks. It has also been stated in the said report that before customers change banks he considers all the factors which help him in switching banks. This would include switching costs also. It was also observed by the Commission that switching costs in the retail bank industry has three significant effects (i) it increases the bank market power and this leads the bank to discriminate between new customers and old customers. The bank would charge low charges to attract new customers and once the customers are locked, the banks would charge higher prices which may be in the form of switching costs. (ii) Switching costs served as an entry barrier because it does not allow switching to consumer to bank with cheaper and better product. If the switching costs are high it was uneconomic for new entrants in the market to induce customer to switching. (iii) The third aspect was it discourages product innovation. When a new product is introduced in the market due to innovation and the switching costs are low the customer would like to switch to the new product. But if the switching costs are high there would be no reward and no customer would like to switch. In the EFTA report it has been stated that in order to have the benefits of the competition in the banking sector the customers should be able to choose their banks. Any obstacle that reduces consumers' ability to switch banks would reduce the competitive pressure on the banks. If closing charges are charged by bank this would reduce the mobility of the customers. High level of switching cost in the banking industry results in increasing the bank market power and enables banks to extract extra rent form the customers. High switching costs also constitute barriers to entry as it makes harder for new entrants to attract new customers and hence it discourage new market entry. High switching costs also discourage product innovation as customers would be reluctant to switch to new products and services. The finding of the both European Commission and EFTA authority are similar.

A study was also carried out by Amsterdam Centre for Law and Economics. In this paper it has been mentioned that switching costs may be a reason for consumers' immobility as they remain locked-in one supplier. Switching costs also influence on behaviour as the firms should attract new customers by charge low prices and in order to exploit captured customers. The firms cannot discriminate between old and new customers due to high switching costs they have been giving incentives to keep their prices high and exploit their old customers instead of attracting new customers through lower prices. Therefore, it has been stated in the report that switching costs played an important role in consumers' decision. In another report the European Commission had analyzed the switching costs in the electricity market. In this report the Commission held that in the market of retail banking a policy of the mobility of the competitors has got to be followed.

An argument has been advanced that banks would suffer a loss if the customers prepay their loans. For this reason a prepayment penalty is levied. There is a fallacy in this reasoning. It is clear from the fact that the banks recover interest and then the principal. Let us take an example. Suppose a customer has taken a home loan of Rs. 1,00,000/= for a period of ten years at an interest of 10%. Then the Balance, principal, interest and E.MI. would be as follows:

At the end Year

Balance

Principal

EMI

2.

200000

6275

26275

2.

93725

6902

26275

2.

86823

7592

26275

4.

79231

8351

26275

5.

70880

9187

26275

6.

61693

20105

26275

7.

51588

21116

26275

8.

40472

22227

26275

9.

28245

23450

26275

20.

24795

24795

26275

If after five years the customer wants to prepay his loan, the balance principal amount payable is Rs. 61,693/=. The customer has to prepay this amount as well as the prepayment penalty of 2%. Though the customer has not completed his tenure, it has paid most of the interest for a tenure equivalent to ten years. The bank is not a loser.

In banking, asset and liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debt and assets) of the bank. A corporation that wishes to acquire an asset must decide whether to pay cash, thereby reducing an asset, or take out a loan, thereby increasing a liability. The banks contended that due to the prepayment of the loans banks will be in a situation in which it will be difficult to manage the liabilities (saving accounts/fixed deposits/borrowing, etc.) of the banks. Further, the concern is also related with the depositors with the banks as they are being provided fixed interest rates on their deposits.

Although, through the pre-payment of loan, the principal money is repaid well in advance to the banks through foreclosure. Even if it has been paid through switching banks or availing loan by the other competitor banks, the bank foreclosing the loan will get their principal money returned well before the tenure and will provide opportunity to further pump in the market.

Concept of time value for money is well recognized in the financial market. As the money received today has better value than the same amount of money received in future. For example, Rs. 100 of today's money invested for one year and earning 5 percent interest will be worth Rs. 105 after one year. Therefore, Rs. 100 paid now or Rs. 105 paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, Rs. 100 invested for one year at 5 percent interest has a future value of Rs. 105.

Accordingly a principal received 5 years earlier will have more value than received 5 years later, as the money will again in the process of generating interest through advances.

Further, the Equated Monthly Installments (EMI) is calculated in such a way that in the initial period of the payment, the component of the principal amount is very low and the interest portion is very high.

Suppose, if any customer wishes to foreclose the loan amount of 1 lakh in the 5th year which has been taken for 10 years at the rate of 10% per annum. The EMI of this will be Rs. 16275/Annual. The EMI contains an interest component as well as a principal component. The interest component is always 10% of the balance -because the interest rate is 10%. The remaining amount is the principal repayment.

In view of the calculation of EMI and the 'time value for money' it is evident that banks are unreasonably charging foreclosure amount as the consumer is bound to pay more first in terms of interest portion in the initial months of the payments and later he is made to pay in terms of pre-payment charges, if he decides to foreclose for better options. As this practice is fleecing the consumers and also it is not generating any economic value to the development and restricting the consumer to exercise the right of freedom to choose better financial options for the loan.

Moreover, the practice of pre-payment penalty on loans is not helping the banks to be more service efficient and competitive on the interest rate being charged on loans to the existing customers as banks are sure of their secured customers due to the anti competitive agreement of pre-payment penalty.

It is thus clear that the main aim of the banks or housing finance companies is to find the customers and not allow them to switch to other institutions. It also allows the banks to overcharge the customers as they are giving loans to new customers at lower rate of interest. Because of these facts, competition between the banks is killed and no new products would come and no innovation would be introduced. This practice also does not allow new banks/institutions with lower rate of interest to garner new business. Therefore, by charging pre-payment penalty, the banks/institutions are following anti-competitive practices which is having an appreciable adverse effect on competition in India.

Another argument which has been advanced is that if the customers prepay their loans what would the banks/HF Cs do with the case which would be available with them. The market of home loan in India is very large and there is a very big shortage of houses in India. Further there is a cap placed on the banks as far as housing loans are concerned. The banks/HF Cs would be in a position to loan the amount received as pre-payment to new loan creditors. This in turn would lead to construction of new houses or the purchase of new flats and would help in the economic development of India.

The housing loan market is a very secure market as the creditors which are banks/HF Cs have the securities of the houses/flats to recover their loans. To spur economic activities and decrease the shortage of houses, the banks/HF Cs have to increase the portfolio of the loans for homes. In India the home loan market constitutes a minuscule of the total loan given by the banks. The banks charge lower interest on large loans given to large industrial houses but they do not do so in the home loan market. When an industrial house is in financial trouble, the banks restructure the loans by waiving interest but it is not done in the case of home loans. Home loans are given in India in two forms. There is a fixed interest home loan and there is a floating interest home loan. In the case of floating interest, home loan if the interest rate rises, the home loan interest is raised by the banks and if the interest rate goes down, the interest on the home loan interest goes down. But in practice it is found that even when the interest has gone down, the banks have not reduced the interest. Thus, the banks/HF Cs have been not very honest with their home loan customers.

On the issue of pre-payment charges on housing loans, a reference was taken up by the Department of Financial Services, Ministry of Finance by a circular dated 05.05.2010 the Department issued a letter to all the CE Os of the Public Sector Banks which is reproduced as under:

CEOs of

All Public Sector Banks

Sub: Pre-payment charges on Housing Loans

Sir,

On a reference made to this Department on the issue of Pre-payment charges on Housing Loans, the issues were examined after taking into account the views of RBI, IBA and select Public Sector Banks.

In the backdrop of examination, you are requested to kindly ensure, in letter and spirit that:

(i) No pre-payment charges are levied when the loan amount is paid by the borrowers out their own sources; and

(ii) The pre-payment charges, if any to be imposed by your Bank on housing loans, the same need to be reasonable and not out of line with the average cost of providing these services.

You are requested to kindly acknowledge receipt of this letter.

Yours faithfully,

(Samir K. Sinha)

Director (BOA & IR)

Recently, the Bank Ombudsman received a complaint against a bank that the bank had levied pre-payment charges. When the issue came up before with the Ombudsman, he found that in the loan sanction letter there was no provision for levying pre-payment charges. The bank was, therefore not entitled to levy pre-payment charges. As a consequence of the order of the Ombudsman the bank had to refund 8.2% of the pre-payment charges taken for the foreclosure of the loan. It is thus clear that pre-payment charges are being levied in many cases wherein the sanction letter, no such penalty was required to be levied by the banks/financial institutions.

A similar case came up before the French Competition Authority. In the year 2000, Conseil de la concurrence (French Competition Commission) found that several banks and institutions had entered into anticompetitive agreement in the sector of home loans. According to this agreement, the banks/institutions had reached an "inter-bank non-aggression pact" under which each of them refrained from making offers to customers of other banks who wished to renegotiate their property loans. Besides aiming to prevent competition between banks, this agreement enabled each of them to better resist requests by their own customers to renegotiate their loans, since the customers in question were subsequently unable to turn to another bank in the event of their request being refused. The Competition Commission held that this agreement between the banks constitutes an anti competitive practice and that was viewed seriously by all the competition authorities. It also ruled that banking activities are subject to competition law and that the competitive workings of the market are based on the independence and autonomy of the players involved. The authority held that because the agreement between the banks acts as barriers the consumers were deprived of the option of significantly reducing their property cost. The authority also hold that property represents the most substantial investment by households and the repayment of loans required for this investment accounts for 30% of their disposable income. Thus, disposable incomes of the household were decreased. For this reason economic development suffered and the markets were deprived of large amount of funds. The authority thereafter levied a fine of one hundred & fifty million on the banks.

In the background of the legal position and the fact of the case, we have to examine each and every argument which has been raised by the banks and HF Cs before the Director General and the Commission. The first argument is that the Commission had no jurisdiction over banks as RBI is the regulator. This argument is without any basis as the jurisdiction over the competition issues is with the Commission and the regulation of banks / HF Cs on other matters is with the RBI.

The second argument is that prepayment fines are more in the nature of unfair or restrictive trade practices and should be dealt with by the Consumer Courts rather than by the Commission. It was, therefore, stated that the Commission had no legal jurisdiction. No basis has been given as to how the issues under consideration are unfair and restrictive trade practices. This argument is therefore, without any basis. In fact, the issues here are ones which show that the banks/HF Cs have created an adverse effect on competition.

The third argument taken is that the decision taken in the IBA Circular of 10th Sep, 2003 should have been disregarded by the DG and that the economic consequences should have been seen by the DG. It has been conceded that the Circular had the intention of disciplining the customers and to increase the income of the banks. In fact the circular which was more in the form of recommendation was issued with the idea of retaining the captured customers by the banks and stop then from switching by levying charges at the time of foreclosure of loans.

The fourth argument taken was that when a borrower prepaid his loan, the bank lost future interest and also lost avenues to invest the funds received. It was stated that this created a mismatch in the asset and liability tenure. It was, therefore, argued that the banks charged penalty from the customers to compensate the losses. Though, most of the banks argued on these lines but none of them brought any data or material to establish this claim. No material has been brought on record to establish that the banks had suffered a loss which entitled them to levy penalty for the foreclosure of loans. On the contrary, as already worked out above, as the banks recover the interest first and the principal in later years, by the foreclosure of loans, applying the principles of discounting, the banks are gainers. Regarding the funds received as prepayment, as the home loan market is very huge, the funds can be redeployed and the banks would be gainers. Therefore, this argument of the banks/HF Cs are without any basis and ought to be rejected.

The fifth argument raised is that the DG has not gathered any evidence to establish the penalty levied is an anti-competitive practice. The DG has invoked Section 3(3)(b) of the Competition Act which is a case of rebuttal presumption. It is for the banks./HF Cs to establish that the presumption is wrong by bringing material on record. This onus cast by the operation of the Act has not been discharged by the banks/HF Cs.

The sixth argument is that PPC enhances cash flow from the borrowers and reduces the volatility of interest rates and therefore enhances consumer welfare. This is a fallacious agreement because the levy of penalty decreases the cash surplus of the borrowers and therefore is detrimental to the welfare of the consumers.

The seventh argument is that PPC is a tool to manage reinvestment risk. It has been argued that when prepayment of loans is made, the banks would have surplus cash which they may not be in a position to invest. To compensate for this loss the penalty is levied. It has been discussed that the home loan market in India is very large with an insatiable demand for home loans and therefore the surplus can cash can be lent to some other borrower. There may be a time lag for which a small compensation from the borrower in the form of one month's EMI may be collected.

The eighth argument was that the international treatment of PPC is not relevant in the Indian context. But no material was submitted to support this claim.

The ninth argument was that when a borrower takes a loan from a bank then he is hit by the provisions of the Contract Act. It was also agreed that the consumer was aware of the fact that he had to make payment of penalty when he prepaid the loan. It was therefore, argued that the consumer was aware of the fact that he had to make payment of penalty when he prepaid the loan. It was therefore argued that in such a case the competition Act is not applicable. This argument is correct to the extent that in any civilized society, priority of contract had to be maintained. But the legislature in its wisdom had also framed laws according to which whenever there is an anti-competitive behaviour the same is required are to be punished. Therefore, this argument of the banks/HF Cs is without any basis.

The tenth argument is that the market should be governed by a monopolist or by an oligarchy and then only it could be said to be anti-competitive. It was argued that in the absence of such a finding, Competition Act would not apply. The fact is that this argument is very simplistic. The provisions of the Competition Act would have to be examined as to whether they would be applicable in the Indian home loan market.

The eleventh argument is that the loans are prepaid due to cyclical factors and that PPC gives rise to demand constraints, as opined by the DG, is without any basis. The DG is to assist the commission and it is for the Commission to decide the anti-competitive behaviour of the participants in the market and not the DG.

The twelfth argument raised is that PPC is not usurious, otherwise it would have been declared so by the Courts. This argument is misplaced as the only issue before the Commission is whether the behaviour of the banks is anti-competitive in the home loan market.

The thirteenth argument is that the DG has recorded a finding that charging of PPC by National Housing Bank and other retail lenders is justified. As already discussed in the scheme of the Competition Act, DG is only an investigative branch of the Commission. If his findings are erroneous and without any basis, the Commission is not bound to perpetuate such erroneous findings. If PPC is found to be anti-competitive, the Commission is bound to take action against National Housing Bank and the other retail lenders.

The fourteenth argument is that the DG has not considered the factors of Section 19 of the Competition Act. The arguments are misplaced because it is the duty of the Commission to consider the factors of Section 19 of the Competition Act and not the DG.

In the fifteenth argument it has been conceded that PPC is harmful to the borrowers. But on the contrary it was stated to be beneficial to the depositors. This argument is without any basis because the gains from PPC have not been transferred to the depositors in the form of higher interest.

The sixteenth argument is that the court cases relied upon by the DG are not relevant. The argument raised here are correct because the court cases are with reference to the Consumer Act and not the Competition Act. Further, the Supreme Court has not opined on the legality of PPC and has left it open.

The seventeenth argument is that the home loan market has grown at a very high rate and that PPC has not deterred the entrance of new entrants to the market. This agreement is without any basis because the market in India has grown inspite of the anti-competitive behaviour of the banks. The reason for growth of the market is the pent up demand for houses, a very high GDP growth and cash surplus with the people in India.

The eighteenth argument is that banks apply upward interest rates to new consumers and not to existing consumers. It was therefore, argued that prepayment penalty is welfare inducing and helps consumers. This argument is totally incorrect. The banks in order to attract new customers charge lower rate of interest and after a year or two put the customers on a floating rate of interest which is substantially higher. But the rate of interest is not reduced even when the interest rate comes down. Thus, the banks are extorting rent from their old customers.

The nineteenth argument was that Section 3(3) is not applicable to the banks/HF Cs because there existed no agreement between the banks and that Section 3(3) would apply only in the case of agreements. A reading of Section 3(3) would show that the Section would apply when the following situations exist- (i) when there is an agreement between the parties. (ii) Practice carried out by the parties. (iii) a decision taken by the enterprises as an association including a cartel. It is also stipulated in the Section that the parties/enterprises should be in the same line of business. Section 3(3) would apply if the conditions of Clauses (a) to (d) are satisfied. The existence of an agreement is not necessary for the application of Section 3(3) of the Act. A practice carried out or a decision taken would also be hit by Section 3(3) of the Act provided the enterprises are in the same line of business.

It has also been argued that the levy of penalty for the foreclosure of loans creates a healthy competition in the market and the bank industry. Further with the existence of PPC the banks are showing very high profits and therefore PPC did not have any adverse effect on competition. It was also argued that banning PPC would have an adverse effect on competition. It has also been argued that the levy of penalty on the borrowers by the banks is beneficial to the consumers. Though these arguments were advanced no material was provided in support of these arguments. It could be possible that high profits of the banks/HF Cs were due to the prepayment penalties of due to large home loan market. No bank furnished the details of their earnings through prepayment penalties. It is not clear how PPC leads to competition and how banning PPC would be anticompetitive. Even how PPC brings benefits to the consumers is not clear.

It was further argued that the PPC has been levied to stop the adventurism of the consumers, to stop volatility in the markets, to discipline the consumers and to stop the consumers from migrating to other home loan suppliers. It was further argued that PPC was a safeguard against competition and unfair trade practices and that PPC was levied to compensate for the losses suffered by the banks. It was also stated that World Bank also levied PPC. From these arguments it is clear that the main aim for the introduction of PPC was to hold on to customers and stop consumer choice. It has been conceded by some of the banks that PPC was introduced to increase profits and reduce competition in the markets. It is not material whether the World Bank charges PPC or not. What is to be examined is as to how the levy of PPC affects the competition in the home loan market.

But before examining competition in the home loan market it is necessary to examine the behaviour pattern of consumers i.e. behaviour economics. Before a theory or hypothesis is formed, it is necessary to have certain axioms. In economics, the axiom is that in a perfect market, a consumer would make a rational choice which would increase his economic well being. The question is as to how this rational choice can be made. This choice depends on whether a person wants to improve his economic well being. It also depends on the information which is available to person in the market. This choice is dependent on the advertisements which flood any market, it depends on brand value, it depends on the services which are given in the market or it could depend on the perceived advantage to the consumer. The consumer can suffer from processing overload. Consumer biases can set in the processing of information. For a market to function properly a consumer should be able to assess access and process information. Because of the bulky information which the consumer has to go through before he enters in the agreement he can enter into an agreement which is anticompetitive. This can happen due to processing overload. The agreement may lead him to high switching costs. It there are high switching costs, mobility of the consumers would be affected. Thus, a new entrants would not get customers and innovation would suffer. Even the allocative efficiency of the markets would suffer. Competition Authorities such as the OFT and others thus realize that behaviour economies plays a major role in the competition in the market. It is recognized that agreements are not sacrosant as God's Ten Commandments. Even if a consumer has signed the agreement, it could be due to misinformation fed by the sellers of the products. Further, as discussed above, switching cost are being recovered even if there was no such factor in the agreement.

In the background of these facts, this case has to be decided. The facts are that the Indian home loan market is very large and is expanding at a very fast pace because of the growth of G.D.P. at a rate nearly 9%. There is a shortage of houses in the country and if the credit in the home loan market increases, due to high pent up demand for loan, the gross domestic product of the country would increase substantially. This in turn would give a boost to the cement and steel industry mainly because housing contributes nearly 6% to 7% to the G.D.P. of India.

But the banking industry and the home finance companies have introduced the concept of fines on the foreclosure of loans before the loans come to an end. When HDFC entered this segment of home loans in 1978, there was no penalty on the prepayment of loans. When competition came in the market in the form of L.I.C. Housing Finance in 1993, HDFC introduced the concept of penalty on the foreclosure of loans. L.I.C Housing finance introduced the system of penalty in 1995. National Housing Bank which is the regulator in the area of home finance and which lends to banks/HF Cs introduced the concept of penalties in 1997. ICICI Bank which entered this field later introduced the concept of penalties on prepayment in 2001. The PSU banks entered the field of home loan at a later date and initially they did not charge any penalty. But after the meeting of the banks in September, 2003 the P.S.U. banks started charging penalties varying from 0.5% to 2%. Subsequently, many of the banks did not levy penalties from customers who prepaid the loans from their own funds. But if the loans were prepaid after taking loans from another bank, the banks levied penalty. Incidentally, according to a report of ICRA, HDFC and SBI have a market share of nearly 17% in the home loan market. ICICI Bank has a share of 13%. Even LIC Housing is a significant player in the market.

There are certain other factors which need to be considered. In the Indian home loan market, the only bank which does not charge penalties for prepayment is the Axis Bank. A rational choice for the home loan borrowers would have been this bank. But Axis Bank is small new bank with few branches. Therefore, it remains an insignificant player in the home loan market. On the other hand, HDFC is the oldest and a major player. SBI being the largest bank with many branches is also a major player. Now if someone wants to shift from HDFC Bank or SBI to Axis Bank he cannot do so because he would have to suffer a penalty. Therefore a new bank with new and innovative product cannot enter the home loan market because the existing borrowers cannot shift to it.

In the year 2008, when the interest rates were falling due to the global economic slowdown, the SBI introduced home loans for new borrowers at 8%. The interest rates were to be raised after one year and after a number of years the interest rates were to be the same as the floating rate of interest. Incidentally, the home loans are given either at fixed rate or floating rate. Though the interest rates had fallen in 2009 none of the banks reduced the floating rate of interest. HDFC, ICICI and some other banks followed SBI. Thus for new borrowers and interest rate was 8% for the old borrowers the interest rate was above 12%. The old borrowers could not shift to other banks as they would suffer prepayment penalties.

During the course of hearing of the banks, it was conceded by some of the banks that the concept of penalties for the foreclosure of home loans was introduced because the banks did not want to lose customers who could have migrated to banks giving loans at a lower rate. They thus wanted to reduce the mobility of consumers and reduce their choice. The banks also wanted to discipline the consumers. The banks wanted to extract rent out of the consumers by charging the penalty as they perceived losses. But what losses they had incurred to would have incurred was not worked out. The banks were also not aware of how much they had earned out of the prepayment penalties. The data was not available because home loans constituted a very small percentage of their total loan portfolio. In fact even today S.B.I. which is the largest bank in the country, has a total home loan portfolio of 13%. Most of the banks talked of asset liability mismatch when the consumers prepaid their loans. But no material to support this claim was furnished. On the contrary, as worked out above no loss is suffered by a bank if a consumer prepays his loan. In fact the prepayment enlarges and deepens the home loan market because there is an insatiable demand for home loans in India. I have already dealt with the arguments raised by the banks.

In view of the above noted factual position, the issues are to be examined with reference to the Competition Act, 2002. The question here is of switching charges which a consumer has to pay in the form of prepayment penalties. There is no doubt that by charging pre-payment penalty the banks reduced the choice of the customers. As a consequence of the prepayment penalty, a customer cannot shift from one bank to another. Further when a new bank enters the market it would not be able to get customers from the other banks because the customer would not like to shift in view of the penalties which he would have to pay if he shifts to a new bank. Thus by levying the pre-payment penalties banks are killing competition in the home loan market. This also leads to decrease in the allocative efficiency of the market and a reduction of innovation. Under the provisions of Section 3(1) of the Act, no supplier of goods and services can enter into an agreement which causes or is likely to cause an appreciable adverse effect on competition. In all the cases where the banks enter into an agreement with a consumer for home loans, the banks have envisaged penalties provided the consumer pre-pays his loans. As already discussed the levy of switching charges in the form of pre-payment penalties causes an appreciable adverse effect on competition. Therefore, under Section 3(2) of the Act of these agreements entered into by the banks are anti-competitive agreements and therefore void.

Before declaring an agreement to be void the provisions mentioned in Section 19(3) of the Act have to be looked into. An appreciable adverse effect on competition under Section 3 cannot be determined without regard to the facts enumerated in Section 19(3) of the Act which are:

(i) Creation of barriers to new entrant in the market.

(ii) Driving existing competitors out of the market.

(iii) Foreclosure of competition by hindering entry into the market.

(iv) Accrual of benefits to consumers,.

(v) Improvements in production or distribution of goods or provision of services.

(vi) Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of service.

In this particular case for the foreclosure of the loans, a barrier has been created for new entrant in the market as no consumer would shift to the new entrant as he would suffer a loss as prepayment penalties would have to be paid. Competition has also effected as hindrance is caused to the consumers by the levy of the penalties when a person shifts to another bank. The next issue is the accrual of benefits to the customers. When pre-payment penalty is levied there is no benefit to the consumer. In fact there is a decrease of benefits to the consumer as he has to pay penalty. Further the choice of the customer decreases. Therefore, the provisions of Clauses (a), (c) and (d) are applicable to the facts of this case. Therefore, by the levy of the switching charges by the banks an appreciable adverse effect on competition within India is created. Therefore the agreement by the banks with the consumers for the levy of penalty for the foreclosure of loans is an anti-competitive act and therefore void in accordance with the provisions of Section 3(1) and 3(2) of the Act.

The provisions of Section 3(4) may also be applicable to this case because home loans enterprises operate in the home loan markets whereas consumers who take a loan from the home loan enterprises operate in the market of construction or purchase of premises from realtors. Thus, the banks and customers operate in different markets. By entering into an agreement where there clauses for the levy of penalty for the foreclosure of loans an exclusive supply agreement is entered into by the banks which its customers. This restriction placed on the customers by the banks also creates an adverse effect on competition in India as the customer is unable to switch to a bank with better and innovative products. It also debars new banks to enter the home loan market even though they may be having better products.

The D.G. has carried out investigation in this case and he has found a contravention by the banks/HF Cs under Section 3(3) (b) of the Act.

The findings of the DG are based on following facts/evidences:

(i) The Circular dated 10th September, 2003 issued by IBA suggests that there is a concerted action on the part of the banks.

(ii) The internal circulars issued by the banks justifying their actions of charging pre-payment penalty are anti-competitive in nature.

(iii) The origin and history of this practice.

(iv) Regulatory position.

(v) Judicial decisions, and;

(vi) International practice.

In order to find out whether the DG has applied the right provisions of law in the given situation, it is important to re-look into the provisions of the Act and find out whether this case fits into the entire scheme of things as provided therein.

Section 3(3) of the Act deals with the following situations:

(i) the agreements entered into between the entities of the class described therein, or

(ii) any practice carried on by them, or

(iii) any decision taken by them and

(iv) Containing the terms set out in Clauses (a) to (d) which in substance are fixing prices, limiting or controlling supply of goods or services or technical development, sharing the market, and bid-rigging or collusive bidding.

If the above conditions are satisfied, it shall be presumed to have an appreciable adverse effect on competition. They are deemed to be in per se violation of Section 3 and the onus is on the party to disapprove this claim.

The classes of parties to an agreement dealt with by Section 3(3) are; enterprises, associations of enterprises; persons or associations of persons and they could act in any combination. It is that they are to be an association of persons or enterprises of services. Where the association of persons or enterprises is publicly identified as a group with a unity of purpose they are named as Cartel.

However, before applying this section, it is important to understand the definition of following "terms" of the provision.

"Practice carried on" - "Practice" has been defined in Section 2(m) of the Act and includes any practice relating to the carrying on of any trade by a person or an enterprise.

"Service"-"Service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking......financing.........and advertising.

In view of the above definition, following questions need be answered in the present case:

a. Is 'Retail Home Loan Financing' is a service being provided by the banks?

b. Is there any practice of pre-payment penalty being carried by the banks?

c. Is there any association of banks?

d. Is there any concerted action on the part of the banks?

e. Are they engaged in identical or similar trade?

f. Are these association of banks is in any way limiting or controlling this provision of services?

If the answer is "yes" then Section 3(3) (b) is clearly attracted in this case because as per definition, the "practice carried on .... by any association of enterprises or association of persons...., engaged in identical or similar trade of goods or provisions of services, which-limits or controls....provision of services;" is covered under Section 3(3) (b) of the Act and once the conditions mentioned in Section 3(3) of the Act are fulfilled, it is deemed to have "appreciable adverse effect on competition".

But before reaching a conclusion that the provisions of Section 3(3) of the Act are attracted in this case the most important thing to find out is:

(i) Whether there is any agreement, arrangement or understanding or action in concert in writing or informal?

(ii) Does this agreement or arrangement or understanding or action in concert cause or likely to cause an appreciable adverse effect on Competition within India?

As per Section 2(b) of the Competition Act, 2002, "Agreement includes any arrangement or understanding or action in concert-

(i) Whether or not, such arrangement, understanding or action is formal or in writing or,

(ii) Whether or not, such arrangement, understanding or action is intended to be enforceable by legal proceedings.

This means that in order to fall under this definition, a concerted action on the part of enterprises or persons is a pre-requisite. Even when party to such an arrangements do not intend to create any legally enforceable mutual duties and liabilities, it shall be considered as an agreement under this act.

In Technip S.A v. S.M.S holding private Ltd. (2005) 5 SCC 465, the Court observed that the term "agreement" covers an arrangement or understanding which may be informal as well as formal. No written proofs of agreements are required, as writing has been done away with.

The definition is designed in such a way as to produce a vast and sweeping coverage for joint and concerted anti-competitive actions. There is no need for an explicit agreement in cases of conspiracy where joint and collaborative action is pervasive in the initiation, execution and fulfillment of the plan-United States v. General Motors 384 US 127.

It has been a contentious issue as to what constitutes an agreement to come within the ambit of competition enquiry. In CFI judgment in Volksawagen AG v. Commission (2003), it has been held that there is no need for an explicit agreement in writing but there should be consensus between the parties concerned also referred to as meeting of minds or concurrence of wills.

It has further been held in Commission v. Bayer AG (2004) 4 CMLR 13, that it is sufficient that the parties to the agreement have expressed there joint intention to conduct themselves in the market in a specific manner. As regards the form in which the common intention is expressed, it is sufficient for a stipulation to be the expression of the parties' intention to behave on the market in accordance with its terms.

However, there have been practical difficulties to establish the existence of an anti-competitive agreement between the firms. The fact is the firms engaging in anti-competitive behaviour have developed sophisticated mechanics of hiding their behaviour so that they escape the liability under the anti trust laws. Lord Denning in RRTA v. W. H. Smith & Sons Ltd. have observed "People who combine together to keep up prices do not shout it from the house tops. They keep it quite. They make their own arrangements in the cellar where no one can see. They will not put anything into writing nor even into words. A nod or wink will do."

From the above definition of "agreement", it can be concluded that if following conditions are there, then it can be said that there is an agreement:

Any formal or informal arrangement or understanding

No need to have an explicit agreement in cases of conspiracy where joint and collaborative action is pervasive in the initiation, execution and fulfillment of the plan

No need for an explicit agreement in writing but a consensus, between the parties concerned which referred to as meeting of minds or concurrence of wills, is sufficient.

It is sufficient that the parties to the agreement have expressed there joint intention to conduct themselves in the market in a specific manner.

As regards the form in which the common intention is expressed, it is sufficient for a stipulation to be the expression of the parties' intention to behave on the market in accordance with its terms.

No need to have anything into writing or even into words. A nod or wink will do.

However, there is a feeling of some different inference on the term "agreement". There is a view that Section 3(3) is wider in scope than Section 3(1) as Section 3(1) deals only with any agreement whereas Section 3(3), in addition to any agreement, also covers practices carried on or decision taken by which results in AAEC. The fact that the Act uses, these three terms also indicates that "agreement", "practices carried on" and "decision taken" are envisaged as distinct and distinguishable. A "follow the leader" syndrome may lead to anti-competitive "practices carried on" and "decision taken" without being an "agreement". But these would still be actionable under Section 3(3) if they result in acts covered under Sub-clauses (a) to (d).

The inference drawn can not be subscribed to. Section 3(1) is the covering section of the entire Chapter on ''Prohibition of agreements'' and it is the broader provisions which covers both Section 3(3) and Section 3(4). In fact, in Section 3(1) two situations i.e. 3(3) and 3(4) have been envisaged. It means that any contravention of Sections 3(3) and 3(4), the contravention of Section 3(1) has to be there. Section 3(1) is inherent and implicit in Section 3(3) and 3(4). It also can not be concluded that "practices carried on" or "decision taken by" as provided in Section 3(3) can be without any "agreement". Agreement is a necessary element in all the sections provided under Section 3. It is the crux of the Chapter ''Prohibition of agreements''. Unless there is an agreement, there can't be prohibition of agreements. Thus, a contravention of Section 3(3) without having an agreement can not be visualized. This presumption is further strengthened by the fact that in Section 19(3) also it is clearly mentioned that 'while determining whether an agreement has an AAEC under Section 3, have due regard to all or any of the following factors, namely (a) to (f).

There is a feeling that to establish an "agreement" between persons, there has to be conclusive evidence. This is not a correct presumption. Even under Evidence Act two types of evidence have been prescribed to establish an offence - i.e. direct and circumstantial. As has been stated above and is a settled position also that in the case of cartels or anti-competitive agreements to establish an "agreement" of being anti-competitive in nature direct evidence can not be found unless through dawn raids, so, one has to depend on circumstantial evidence or the preponderance of probabilities. In the present case there is both circumstantial evidence as well as preponderance of probabilities which establishes that there was an "agreement" among the banks to carryout the practice of charging pre-payment penalty. Further, Evidence Act is strictly not applicable to these proceedings.

Now, let us examine whether any or all elements of an anti-competitive agreements are present in the case under consideration. Is it not a fact that there was a meeting of IBA in September, 2003 where all members bank were present and the issue of pre-payment penalty issue was discussed? It is irrelevant whether there was an agreement, consensus or a decision to impose the PPC. Why this meeting was held in 2003? There is a background to that. When HDFC was the only player in the home loan financing market from 1978 to 1993, they never felt the need of imposing PPC nor they raised any issue such as ALM, but when LIC HFC entered into the market in 1993 then they felt threatened and started charging PPC. Again when other players entered the Home Loan Market, the LIC HFC also started charging PPC to protect its market. Then other players also started advocating the imposition of PPC in order to hold their domain. That was the reason why this IBA meeting was held in 2003. Though, no consensus was reached due to opposition from some of minor players in HLF market, all major banks started this practice after this meeting.

So, what these signify?

Was not there any tacit arrangement or understanding or a joint conspiracy and collaborative action which is pervasive in the initiation, execution and fulfillment of the plan i.e. the charging of Pre-payment penalty.

Was not there meeting of minds or concurrence of wills?

Have not they expressed there joint intention to conduct themselves in the market in a specific manner.

Was any formal, explicit or written agreement is still required in this case.

Is not there a concerted practice on the part of the banks to charge pre-payment penalty more or less at the same rate and terms & conditions.

Is not there any coordination among the banks to charge pre-payment penalty to protect their market as held by the European Court of Justice in Sugar Cartel Case (1969) 3 All ER 1065 that conceptually concerted practice is a form of coordination between the parties where they have not reached the stage of actual agreement but knowingly coordinate their actions and cooperate with one another instead of competing with each other.

Now, coming to the "Practice carried on" by these Banks" which is limiting or controlling the provision of services", it is a fact that the banks have adopted the practice of imposing prepayment penalty to Borrowers who wish to either repay their loan in advance or to the Borrowers who wish to migrate the said loan to another lender. The Banks are charging a rate of prepayment penalty varying from 1% to 4% on the outstanding loan amount. The banks have formed an association of banks known as Indian Banks Association (IBA). Though the Circular dated 10th September, 2003 issued by the IBA was not binding on any banks and it was optional for any bank to impose pre-penalty charge, it can not be denied that the practice adopted by most of the banks is a concerted action on the part of the banks in view of the settled legal position discussed as above. These banks are indulged in the restrictive practice as the consumers are not allowed to switch over from one bank to another because of this prepayment penalty clause. Switching costs are costs that existing customers have to incur when changing suppliers. Customer mobility and choice is essential to stimulate retail-banking competition but, here, consumers are tied to their bankers due to the existence of switching costs i.e., pre-payment penalty charge.

Secondly, the loans were provided to those customers by the banks on floating rate of interest were made to understand that the rates will fluctuate as per the prevailing conditions of the market, however, in practice, it is observed that interest rates were revised upward and not downward. Whenever there was condition in the market to lower the interest rate, lower rate of interest were being offered to the new customers and the existing customers were not being benefited.

Differential treatment were being given to the new loan customers by the banks by providing very lower interest rate on loan amount in comparison to the existing loan consumers. If the existing customer asked banks to lower the interest rate at par with the new customers, it was conditioned by the banks to pay pre-payment penalty/ foreclosure amount on the outstanding loan, and then to apply for fresh loan.

If any customer decides to pre-pay/foreclose the loans, they had to pay a certain percentage as penalty amount i.e. normally 2%-5% on the outstanding loan amount to clear their account. Is not this practice anti-competitive, and the practice is limiting the provision of services?

Now, what is to be seen by the Commission? Under Section 19(3) of Competition Act, 2002, the Commission, while determining whether an agreement has an appreciable effect on competition under Section 3, is required to consider the all or any of the following factors:

(a) creation of barriers to new entrants in the market;

(b) driving existing com[editors out of the market;

(c) foreclosure of competition by hindering entry into the market;

(d) accrual of benefits to consumers;

(e) improvements in production or distribution of goods provision of services;

(f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services,

However, it is a wrong presumption that the parameters prescribed under Section 19(3) are not required to be applied while assessing an "agreement" under Section 3(3) as it is a deeming provision. Merely because it is a deeming provision, it does not mean that the Commission is deprived of its powers to apply these factors while determining AAEC. Section 19(3) is a mandatory provision and the Commission is bound to apply these factors for arriving at AAEC. In my opinion the deemed provisions of Section 3(3) is for forming a prima facie opinion and not the final one. The parameters given in Section 19(3) are not the 'cause' of AAEC but a result thereof. For example, if an "agreement" results into the creation of barriers or driving existing competitors or forecloses the competition and so on, there has to be AAEC.

So, what Commission is to determine is that due to the practices followed by the banks are there any entry barrier is being created? Is the competition is being foreclosed by hindering entry into the market or due to such practice any benefit is being accrued to the consumers? Because, the principle objective of competition law is to maintain and encourage competition as a vehicle to promote economic efficiency and maximize consumer welfare. The focal point of competition should be the actual and / or potential business conduct of firms in a given market and not on the absolute or relative size of firms. What needs to be seen by the commission is that whether a firm can exercise "market power", i.e. engage in business practices which substantially lessen or prevent competition. The relevant product market in this case is "retail market of home loan financing" and the relevant geographic market is whole of India.

The case was, therefore, examined from the point of view of Section 19(3) and it is found that:

(i) The practice of imposing prepayment penalty to borrowers who wish to either repay their loan in advance or to borrowers who wish to migrate the said loan to another lender, is rampant in the market and there is only one exception to that. The rates of prepayment penalty vary from 1% to 4% on outstanding loan. The said prepayment penalty charged from borrowers appears to be arbitrary, anti competitive and without any basis.

(ii) The asset liability mismatch argument does not support a charge of 1-4% penalty. Moreover, at least in an increasing interest rate scenario, the lender is actually benefited by the prepayment because it should have raised the money at cheaper rate and now it can lend it at much higher rate, so there is no reason to levy a charge on the prepayment. Secondly, ALM is not account specific and it matches the tenors of all deposits with all loans. This aggregation effect should render the impact, if any, to an insignificant amount.

(iii) Large corporate prepay hundreds of crores of loans (which should cause bigger ALM issue for banks) whenever they get cheaper funds, but it is a common knowledge that the banks do not charge any prepayment penalty. Moreover, the same corporate are given funds below PLR rates. It goes to prove that loss due to ALM is not the reason to charge prepayment penalty. It is mainly to restrict small borrowers from choosing a cheaper loan.

(iv) The prepayment penalty is clearly to stop a borrower from going to a competitor for a cheaper interest rate or for better service. Through the pre-payment of loan, the principal money is repaid well in advance to the banks through foreclosure. Even if it is paid through switching over from one bank to another, the banks get their principal money returned well before the tenure and this provides opportunity to the banks to further pump money in the market.

(v) Prepayment penalty is in effect an enhancement of interest rate from back door. The lenders advertise a lower interest rate but in effect it is higher due to such penal charges.

(vi) At the time of sanction of loans the lenders recover processing and other charges over and above the interest charge which is sufficient to cover all their risks plus a reasonable profit. There is no reason to impose prepayment penalty to the tune of 1-4% of outstanding amount.

(vii) Most borrowers fail to reckon and compare the exit loads mentioned by the lender because they are not clear when they will need to repay the loan and what will the outstanding at that time. This situation is exploited by the lender.

(viii) There appears to be no financial calculation to establish that prepayment charge of 1-4% is reasonable and justified as the concept of 'time value for money' is not recognized by these Banks. As the money received today has better value than the same amount of money received in future. If we calculate the EMI and the 'time value for money' it will be evident that banks are unreasonably charging foreclosure amount as the consumer is bound to pay more first in terms of interest portion in the initial months of the payments and later he is made to pay in terms of pre-payment charges, if he decides to foreclose for better options. This practice is fleecing the consumers and also it is not generating any economic value and restricting the consumer to exercise the right of freedom to choose better financial options for the loan.

(ix) Moreover, the practice of pre-payment penalty on loans is not helping the banks to be more service efficient and competitive on the interest rate being charged on loans to the existing customers as banks are sure of their secured customers due to the anti competitive agreement of pre-payment penalty.

(x) There has been a tacit agreement among banks to follow the practice of pre-payment penalty and foreclosure fees on loans as to hold back their customers from switching over to other banks. Since all lenders have imposed prepayment penalty, it indicates of a concerted action leading to suspicion of cartelization. In fact, many lenders have already admitted that this practice is being adopted by them to stop their customers to switch over from one bank to another.

(xi) Even if it has not all the elements of cartel, which is prohibited under Section 3(3) of the competition Act, 2002, customers were prevented from significantly reducing their property debts as it represented the most substantial household and repayment accounted for 50% of their disposable income. This restricts competition, as it restricts a consumer to avail banking services of another bank which is ready to offer the loan at lower interest rates.

Now, coming to the legal position, the Supreme Court, In Usha Vaid v. State Bank of India RP No. 2466/2007 in a consumer grievance case has upheld the decision of the National Consumer Grievance Redressal Commission wherein it was held by them that there should be no pre payment charge on migration of loan to another lender and the levy of pre-payment penalty amounts to unfair and restrictive trade practice.

In another case, the French Competition Authority known as Conseil de la Concurrence, has dealt with the identical issue of giving property loans to individuals by different banks and charging pre-payment penalty. The gist of the decision is given below:

Facts: In this decision, the Conseil de Ia Concurrence had, for the first time, to deal with anticompetitive practices in the banking sector. In 1993, the Conseil decided on its own initiative to investigate the property loans to individuals offered by the main French high-street and saving banks representing up to two-thirds of the relevant market.

The investigated period took place while the long-term property loans were fluctuating, peaking at 20 per cent in the early 1980s then falling gradually from 12 per cent in 1992 to less than 8.5 per cent in 1994. In such circumstances, any individual whose loan's maturity exceeded five-seven years, could have benefited from the fall. Loans holders were then interested in either renegotiating with their bank, or benefiting from the competitive situation by paying off their loan earlier and subscribing to a new one in a rival bank.

However, such a possibility allowing individuals to take full benefit of the market evolutions had been jeopardized by an "inter-bank non-aggression pact" which led to two main competition restrictions. First, the banks who signed the said agreement refrained from making offers to rival banks' customers who wanted to subscribe to a new loan. Secondly, the agreement enabled each of the banks to better resist requests by their own customers to renegotiate their loans, since these customers could not ask another bank in case their request was rejected.

The Conseil noted that, even if a cartel agreement between banks was not applied in a uniform manner, borrowers were prevented from significantly reducing their property debts, even though property represented the most substantial investment by households, and the repayment of loans required for this investment accounted for 30 per cent of their disposable income.

According to the banking establishments, the outstanding amounts likely to be affected by the renegotiation of property loans during the period in question amounted approximately to EUR 90 billion. However, households were only able to renegotiate around EUR 5.5 billion which represented for them an overall reduction in interest charges of about EUR 450 million over 10 years.

Given the seriousness of the practice and the national scope of the agreement implemented by the main property loans operators, the Conseil imposed fines to nine banks totaling more than EUR 150 million. This is one of the highest fines ever imposed by the Conseil de la Concurrence.

Comment: The Conseil de la Concurrence stated that, although banking activities are governed by specific regulations, they are still subject to competition law. The Conseil also indicated that any competitive market is based on the independence and autonomy of the players involved. It stated that when concerted practices lead to the removal of any uncertainty, they effectively distort competition; since each single actor is assured that the 0tber banking networks will apply the same commercial policy.

In view of the facts and circumstances stated above there is no doubt that there is a contravention of Section 3(3) (b) of the Competition Act, 2002 as these Banks have adopted a practice of imposing pre-payment penalty by way of a concerted action which in effect limits or controls provision of services which resulted into foreclosing of customers mobility and by hindering entry into the market and thereby no benefit is being accrued to the consumers.

In the consequences by having a system of pre-payment penalties for the foreclosure of the loans, the banks and the home loan companies have contravened the provisions of Section 3(1), 3(2), 3(3) and 3(4) of the Competition Act.

After all due considerations to the submissions and relevant case laws and oral submissions by different Banks and DG Report. I have found that the Banks/HF Cs have contravened the scheme of the Act and are indulged into anti-competitive practices.

In accordance with the scheme of the Act, after finding of contravention of Section 3 or Section 4 of the Act, order under Section 27 has to be passed by the Commission.

Section 27 of the Act read as follows:

Orders by Commission after inquiry into agreements or abuse of dominant position

Where after inquiry the Commission finds that any agreement referred to in Section 3 or action of an enterprise in a dominant position, is in contravention of Section 3 or Section 4, as the case may be, it may pass all or any of the following orders, namely:

(a) direct any enterprise or association of enterprises or person or association of persons, as the case may be, involved in such agreement, or abuse of dominant position, to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position, as the case may be.

(b) impose such penalty, as it may deem fit which shall be not more than ten per cent of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse:

(Provided that in case any agreement referred to in Section 3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher.)

(c) (Omitted by Competition (Amendment) Act, 2007)

(d) direct that the agreements shall stand modified to the extent and in the manner as may be specified in the order by the Commission;

(e) direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any;

(f) [Omitted by Competition (Amendment) Act, 2007]

(g) pass such other order or issue such directions as it may deem fit.

(Provided that while passing orders under this section, if the Commission comes to a finding, that an enterprise in contravention to Section 3 or Section 4 of the Act is a member of a group as defined in Clause (b) of the Explanation to Section 5 of the Act, and other members of such a group are also responsible for, or have contributed to, such a contravention, then it may pass orders, under this section, against such members of the group.)

The Competition Act is new Act and the enterprises operating in India re still unaware of the practices which can cause infringement of the Act. However, it has been concluded that the practices carried out by the Banks/HF Cs were appreciably affecting the Competition in the Home loan market and perilously affecting the consumers. In view to restore better competition in the market and considering the plight of consumers, I pass following orders to all the Banks and HFCs:

All the Banks and HF Cs operating in India are directed

(i) to stop all such agreements with the customers relating to charging of prepayment of penalty or foreclosure fees or any such switching cost which creates barriers to the customers to shift to avail finances from other cheaper sources, even if it is not paid through their own sources.

(ii) not to enter into an agreement with the customers relating to charging of prepayment of penalty or foreclosure fees or any such switching cost which creates barriers to the customers to switch to avail finances from other cheaper sources, even if it is not paid through their own sources.

(iii) to refund all the prepayment charges or foreclosure fees to the customers who have repaid the loans after 20th May, 2009 if collected by the Banks/HF Cs as the provisions related with 'anti-competitive practices' and 'abuse of dominant position' became operational and law of the land on the said date.