Lenders not allowed to levy foreclosure charges on MSEs, says RBI

The Reserve Bank of India (RBI) on Wednesday said that banks and non-banking financial companies (NBFCs) cannot levy foreclosure charges or pre-payment penalties on floating rate term loans sanctioned to Micro and Small Enterprises (MSEs).

A draft circular is also expected to be issued for public consultation.

Earlier, these regulated entities were not permitted to charge pre-payment penalties on floating rate term loans given to individual borrowers, except in case of business purposes.

“The Reserve Bank has taken several measures over the years to safeguard consumers’ interest. As part of these measures, Banks and NBFCs are not permitted to levy foreclosure charges/pre-payment penalties on any floating rate term loan sanctioned to individual borrowers for purposes, other than business,” RBI Governor Shaktikanta Das said while announcing the review of the monetary policy on Wednesday.

“It is now proposed to broaden the scope of these guidelines to include loans to Micro and Small Enterprises (MSEs). A draft circular in this regard shall be issued for public consultation,” Das added.

Analysts said that the implementation of the norms will negatively impact the income of these lenders while increasing pre-payment of loans and balance transfers.

According to Anil Gupta, senior vice-president, co group head - Financial Sector Ratings, ICRA, “MSEs typically take unsecured business loans, which are normally on a fixed rate, as well as loan against property, which is on floating rate. While positive for customers, the RBI's move will have a negative impact on the profitability of lenders, and could also potentially increase the loan prepayments and balance transfer.”

Speaking on similar lines, Karan Gupta, director, India Ratings and Research, said, “…balance transfers could increase in the absence of these charges, creating volatility in business fundamentals for entities with a high share of such loans.”