The RBI on Friday proposed to do away with foreclosure charges or pre-payment penalties charged by banks and other lenders on all floating rate loans, including for business purposes, availed by individuals as well as micro and small enterprises (MSEs). The draft norms stated that lenders shall permit foreclosure/ pre-payment of all floating rate loans sanctioned for purposes other than business to individuals, with or without co-obligant(s).
In terms of the extant norms, certain categories of regulated entities (REs) are not permitted to levy foreclosure charges/ pre-payment penalties on the floating rate term loans sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).
The draft norms also said that other than Tier 1 and Tier 2 Primary (Urban) co-operative banks and base layer NBFCs, shall not levy any charges/ penalties in case of foreclosure/ prepayment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligant(s), for business purpose. However, in the case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of Rs 7.50 crore per borrower.
The draft norms also stated that lenders shall permit foreclosure/ pre-payment of loans without stipulating any minimum lock-in period. Lenders shall not levy any charges/ penalties in cases where foreclosure/ prepayment is effected at the instance of the lenders. The applicability or otherwise of foreclosure charges/ pre-payment penalties shall be appropriately mentioned in the Key Fact Statement 3 for applicable loans and advances.
According to the draft norms, lenders shall not levy any charges retrospectively at the time of foreclosure/ prepayment of loans, which were waived off by the lenders not disclosed in advance to the borrowers, under any circumstance.
Reserve Bank’s supervisory reviews have indicated divergent practices amongst lenders with regard to levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs which lead to customer grievances and disputes
RBI has invited comments from stakeholders by March 21, 2025.
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