• Finbros Finance
• February 24, 2025
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RBI proposes Zero Loan foreclosure charges, pre-payment penalties

The Reserve Bank of India has proposed new guidelines for all lenders concerning imposing foreclosure charges and pre-payment penalties on loans.

The deletion of foreclosure charges or pre-payment penalties on floating rate loans, those availed by individuals and micro and small enterprises (MSEs), is what the central bank wants to be removed across the board by all regulated entities (REs).

Stressing responsible crediting practices by lenders, the RBI’s draft circular said that according to the existing instructions, certain categories of lenders cannot levy foreclosure charges or pre-payment penalties on floating rate term loans sanctioned for purposes other than business, applicable for individual borrowers with or without co-obligor.

In regard to foreclosure charge practices, it is the belief by the RBI that access to affordable short-term financing for MSEs is paramount.

In the draft circular, the RBI also stated that supervisory reviews have unearthed the practice among REs to charge different fees as opposed to other lenders when granting loans to MSEs. As a result, these accused lenders have found themselves in a quarrel with MSE clients in general. To remedy this situation, practitioners applying for a loan often include unjust conditions in the contract in order to compel borrowers to remain with one lender instead of switching to another one offering better interest rates and/or better servicing conditions.

Revised regulations on foreclosure charges:

Regulated entities, “other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs,” shall not charge any fees/penalties on foreclosure/pre-payment of floating rate loans granted to individuals and MSE borrowers, regardless of whether one or more co-obligants are involved for business purposes. In case of MSE borrowers, however, these instructions shall apply only up to an aggregate sanctioned limit of ₹7.50 crore per borrower.

The circular states that these instructions will be applicable regardless of the sources whether through complete or partial payment of loans for the purpose of foreclosure/prepayment.

Special, Dual-rate Loans:

For loans with dual/special rate structures (combination of fixed-and-floating rates), the foreclosure and pre-payment rules will be determined by whether at the time of foreclosure or pre-payment, the loan is a fixed, or floating rate, it clarified.

In the case where foreclosure charges/pre-payment penalties are permitted, such charges/penalties will be levied according to the board-approved policy of the REs. The RBI proposes that these charges/penalties will be applicable on the outstanding amount for term loans and the sanctioned limit for cash credit/overdraft facilities.