The Reserve Bank of India (RBI) has proposed banning foreclosure and prepayment charges on floating rate loans extended to individuals for non-business purposes and to micro and small enterprises (MSEs).
The central bank issued a draft circular on Friday outlining the new regulations and has invited stakeholder feedback by March 21 before finalising the rules.
Under the proposed norms, lenders will not be allowed to levy any penalties on individuals repaying floating rate loans taken for non-business purposes.
Similarly, for floating rate loans availed by individuals and MSEs for business purposes, banks—except Tier-I and Tier-II primary (urban) co-operative banks and base layer non-banking financial companies (NBFCs)—cannot impose foreclosure or prepayment charges. The exemption applies to MSE borrowers with loan exposure of up to Rs 7.5 crore.
Other categories
For other categories of loans where foreclosure or prepayment charges apply, lenders must follow a board-approved policy.
The RBI has directed that such charges be based on the outstanding loan amount in the case of term loans and on the sanctioned limit for cash credit or overdraft facilities. Additionally, banks and NBFCs must allow borrowers to prepay or foreclose loans without imposing any minimum lock-in period.
The RBI stated that the move follows its supervisory reviews, which revealed inconsistencies in how lenders impose foreclosure charges on MSE loans, leading to customer disputes.
