RBI proposes to scrap foreclosure charges on floating-rate loans for retail and MSME borrowers

The Reserve Bank of India (RBI), in a draft circular has 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. For floating rate loans sanctioned for business purposes to individuals and micro and small enterprises (MSEs), the central bank has mandated that lendersother 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. The RBI noted that if lenders levy foreclosure charges or prepayment penalties, it must be in accordance with a board-approved policy. The charges levied 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. Lenders must permit foreclosure or prepayment of loans without stipulating any minimum lock-in period, says RBI.

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