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17 March 2011
On December 2 2010 in Neeraj Malhotra v Deutsche Post Bank Home Finance Ltd (Case 5/2009) the Competition Commission held, among other things, that the practice employed by some banks and financial companies of imposing charges for the pre-closure of mortgage loans does not violate the Competition Act 2002. By a four-to-two majority, the commission set aside the findings of the director general that such charges are anti-competitive in nature and contravene Section 3 of the act. The full text of the decision is available on the commission's website.(1)
At issue was the fact that some banks and non-banking financial companies charge customers penalties on prepayments of their mortgage loans. The informant alleged that a group of mortgage loan providers had formed a cartel by levying a uniform 1% to 4% prepayment penalty charge on borrowers who wished to prepay their loans themselves or refinance them through another bank or non-banking financial company at a cheaper interest rate. According to the informant, this practice was anti-competitive and amounted to abuse of dominance, since it restricted customer choice.
On September 10 2009 the commission ordered the director general to investigate the matter; the director general submitted his report on December 16 2009. He found that the agreements were in violation of Section 3(3)(b) of the act, and that the group of banks had taken a collective decision under the auspices of the Indian Banking Association to limit market competition and generate fee-based income. In his findings he noted that the collective decision of the banks was beneficial only to the banks and therefore was anti-consumer and anti-competitive. He concluded that the banks' levying of prepayment charges violated Sections 19(3)(a), (c) and (d) of the act.
By a majority decision, the validity of the prepayment charges was upheld and the bench observed that:
"borrowers have a lot of choice about the banks from which they can take a home loan; the terms and conditions of each are known to them and included in their agreement/contract for taking the loan."
The bench held that "there are no facts that point towards a dominant position of any of the banks/[housing finance companies] investigated". It also held that since none of the investigated banks or housing finance companies "individually" had any dominant position in the retail mortgage loan market, Section 4 (on abuse of a dominant position) of the act was irrelevant to the facts of the case.
On the issue of cartel-like behaviour, the majority view noted that the reference to Indian Banking Association meetings held in July and August 2003 as the starting point of concerted moves by the banks to levy prepayment charges was misplaced. While noting that some of the banks (eg, HDFC Bank) were not even members of the Indian Banking Association and that others (eg, LIC) had been imposing prepayment charges since 1995, the majority held that:
"The lack of imperative voice and intent is evident from the language and content of the said circular of [the Indian Banking Association]. It would be patently unjust to use it as evidence of either action in concert or a process of combined decision making by the banks. This rules out any element of contravention of sub section (1) of section 3 (prohibition on agreements having appreciable adverse effect on competition)."
It was also held that:
"it is equally clear that there is no agreement amongst the various service providers i.e. the banks/[housing finance companies], nor is there any uniform practice being followed by them."
Accordingly, the majority held in favour of the banks, both in terms of an absence of a dominant position and a lack of any agreement having an anti-competitive effect, and found that there was no violation of competition law in the case at hand.
Two commission members (Mr PN Parashar and Mr R Prasad) in their dissenting orders found that, in light of the 2003 Indian Banks Association meetings, the practice of levying prepayment charges was anti-competitive and amounted to cartelisation. The dissenting view held that:
"the analysis of the follow-up actions by banks/[housing finance companies] demonstrates that out of fifteen opposite parties, twelve opposite parties started adopting the practice of charging PPP (Pre-payment Penalty) 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. This practice as adopted by the opposite parties is in the nature of a cartel-like behaviour and anti-competitive practice."
The practice was held as "seriously jeopardising the interests of consumers". According to Parashar, although the banks were not to be penalised, directions were to be issued to restrict them from levying any further prepayment charges. Prasad not only recommended that the practice of imposing prepayment charges be ceased, but also requested that the banks refund the amounts levied as prepayment charges to all customers who had repaid their loans after May 20 2009 (the date of enforcement of the provisions related to anti-competitive practices and abuse of dominant position).
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