INDUSTRY
RBI’s draft paper proposes to scrap foreclosure charges levied by lenders
- IBJ Bureau
- Feb 22, 2025
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, taken by individuals as well as micro and small enterprises (MSEs).
In terms of the extant norms, certain categories of regulated entities (REs) are not permitted to levy foreclosure charges or pre-payment penalties on floating rate term loans sanctioned, for purposes other than business, to individual borrowers with or without co-obligants.
“REs, other than tier-I and -II primary (urban) cooperative banks and base layer NBFCs, shall not levy any charges or penalties in case of foreclosure or pre-payment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligants, for business purpose,” an RBI’s draft circular said.
However, in case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of Rs 7.50 crore per borrower, said the draft on Responsible Lending Conduct – Levy of Foreclosure Charges/Pre-Payment Penalties on Loans.
The RBI’s supervisory reviews have indicated divergent practices amongst REs with regard to levy of foreclosure charges or pre-payment penalties in case of loans sanctioned to MSEs which lead to customers’ grievances and disputes.
Further, certain REs have been found to include restrictive clauses in loan contracts or agreements to deter borrowers from switching over to another lender, either for utilising lower rates of interest or better terms of service.
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