RBI proposes to do away with pre-payment levy on business loans taken by individuals/MSEs

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).

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).

"REs, 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," an RBI's draft circular said.

However, in the case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower, said the draft on 'Responsible Lending Conduct – Levy of Foreclosure Charges/Pre-payment Penalties on Loans'.

Reserve Bank’s supervisory reviews have indicated divergent practices amongst REs with regard to the levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs which lead to customer grievances and disputes.

Further, certain REs have been found to include restrictive clauses in loan contracts/agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service.

The draft circular further said REs should permit foreclosure/pre-payment of loans without stipulating any minimum lock-in period.

They should not levy any charges/penalties in cases where foreclosure/ prepayment is effected at the instance of the RE.

Lenders regulated by the RBI should also not levy any charges retrospectively at the time of foreclosure/prepayment of loans, that were waived off by the REs/not disclosed in advance to the borrowers, under any circumstances, the draft said.

The central bank has invited comments from stakeholders by March 21, 2025.