Reserve Bank of India for foreclosure of biz loans to MSEs, individuals

The Reserve Bank of India (RBI), in a draft circular issued on Friday, mandated lenders to permit foreclosure or prepayment of all floating rate loans sanctioned to individuals for purposes other than business, without levying any penalties or charges.

 

Similarly, for floating rate loans sanctioned for business purposes to individuals and micro and small enterprises (MSEs), the central bank has mandated that lenders—other than Tier-I and Tier-II primary (urban) co-operative banks and base layer non-banking financial companies (NBFCs)—cannot levy any charges or penalties in case of foreclosure or prepayment. The threshold for MSE borrowers has been set at Rs 7.5 crore.

 

Separately, in other cases, if lenders levy foreclosure charges or prepayment penalties, it must be in accordance with a board-approved policy. Even so, the RBI stated that the charges levied by lenders must be based on the outstanding amount in the case of term loans and the sanctioned limit in the case of cash credit or overdraft facilities.

 

Further, lenders must permit foreclosure or prepayment of loans without stipulating any minimum lock-in period.

 

The need for the draft circular arose as the central bank, in its supervisory reviews, discovered divergent practices among regulated entities regarding the levy of foreclosure charges or prepayment penalties on loans sanctioned to MSEs, leading to customer grievances and disputes.

 

The RBI has invited comments and feedback from stakeholders and the public on the draft circular by March 21, after which it will issue the final circular.