Competition watchdog rules banks can levy foreclosure penalty on home loans
Deevakar Anand | December 16, 2010
The competition commission of India (CCI) tottered its way to releasing its first ever order last week following a full investigation by its director general where it ruled that the practice of imposing prepayment charges by banks and housing finance companies on the early repayment of home loans is not anti-competitive.
The order has come eight long years after the parliament passed the Competition Act (2002) and the provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position were notified on May 20, 2009. On a complaint filed by one advocate Neeraj Malhotra against Deutsche Post Bank Home Finance Ltd in August,2009, the competition watchdog has ruled that banks and housing finance companies were not violating competition laws by charging the penalty on early repayment of home loans.
CCI, in its order made it amply clear that the levy, neither amounts to an anti-competitive agreement, nor abuse of dominant market position. “There is no bank or housing finance company in the market that can be deemed to be dominant based on the parameters used for determining such practices. The question of abuse of dominance, therefore, does not arise”, reads the CCI order. The order further contains that it is equally clear there is no agreement among the various service providers—banks or housing finance companies - nor is there any uniform practice being followed by them. And that they are operating as competitors in a vibrant competitive market.
CCI has cleared 16 banks of having acted in a cartel to fix penalty rates of homeowners foreclosing housing loans. Notices were issued to State Bank of India (SBI), ICICI Bank Ltd , Axis Bank Ltd , Punjab National Bank (PNB), Canara Bank , Indian Overseas Bank (IOB), Indian Bank , Oriental Bank Of Commerce (OBC) and HDFC Bank Ltd, home financiers like Housing Development Finance Corp Ltd (HDFC) and LIC Housing Finance Ltd among others. These institutions in their response had put apprehensions of higher lending risk for bankers and asset-liability mismatch in the event of removal of the prepayment penalty.
Passing a majority decision of 4-2, the order has dug into detail the core issues of legality of such levy, collusion among the institutions over this, whether there is some “appreciable adverse effect on competition”, evidence of dominance or its abuse and whether such a practice by the banks limit competition in the home loan market or choice of the borrower. Two members, however, issued dissenting orders in which they suggested that banks should discontinue with the practice of charging such a penalty.
Ironically, the competition regulator had not passed a single order in more than a year of being into existence until it did last week. This is being attributed to the the absence of clarity of CCI’s ambit in the complex competition law regime of the country.
This order could also come not before the supreme court postured in favour of CCI this September and provided the competition watchdog which had been struggling to find its feet, much needed shot in the arm. The apex court had refused to stay a probe by CCI into alleged intent of cartelization in the two year old strategic alliance between Kingfisher and Jet Airways.The Court’s standpoint in this case, apart from putting into perspective the purview of CCI also established that CCI could investigate alliances like this one between the two private carrier that pre-date the Competition Act of 2009. Kingfisher had been contending CCI could not do this as the alliance had come into existence well before the Competition Act 2009 from which CCI draws its powers.
Another seminal ruling of the SC on India’s competition law regime was when it struck down a ruling of the Competition Appellate Tribunal (Compat) against CCI. The matter involved a CCI investigation on a complaint filed with it last year by Jindal Steel and Power Ltd (JSPL) which alleged that the “exclusive supply agreement” between the Indian Railways and the Steel Authority of India Limited (SAIL) on supply of rails was anti competitive and dominant in nature. However, SAIL appealed to Compat which stayed the investigation in February this year and disallowed CCI to be a party to such appeals. In its order, SC made it amply clear that the appellate body can only hear cases once CCI has passed its orders on them. It also ruled while CCI is still establishing the legitimacy of a complaint the entities being investigated cannot be heard. And contrary to what the Compat had ruled, SC went a step further and allowed CCI to choose to be a party in appeals involving orders arising from complaints made by others as well in investigations taken by it suo motu.
The faith that the SC reposed in the commission’s abilities through the two orders gave it stronger teeth in terms of clear cut statutory powers and expeditious statutory processes. CCI came into being replacing its dead and decaying predecessor Monopolies and Restrictive Trade Practices Commission (MRTPC) which had around 2,000 cases pending with it.
Unlike MRTPC which would pass only cease and desist orders, which had no penal impact, CCI has been empowered to impose fines and penalties, in some cases, up to 10 % of an entity’s last three years turnover.CCI will also eventually approve mergers and acquisitions once its powers in this regard are notified by the government.
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