Banks or financial institutions will not be able to charge pre-payment penalties from those who repay the loan before time, RBI has released a draft paper
Loan Foreclosure Charges: This will now apply to micro and small enterprises along with individuals. However, in the case of medium enterprises, it will be applicable only on the total approved loan of Rs 7.50 crore.
RBI On Pre-payment Penalties: There will be no pre-payment penalty or foreclosure charge on repayment of floating rate loan before time from banks and other lenders. This will now be applicable to micro and small enterprises (MSEs) along with individuals. The Reserve Bank of India, the regulator of the banking sector, has made this proposal. RBI has issued a draft paper regarding this proposal, on which suggestions have been sought from stakeholders by March 21, 2025.
The Reserve Bank of India said in its draft paper, it has been found that entities regulated by it put such restrictive proposals in the contract or agreement with the loan taker that the customer cannot switch to other lenders who can avail cheaper loans or cannot switch the loan to a lender who provides better services. The RBI has made it clear in its draft paper that banks or other financial institutions will have to allow pre-payment or foreclosure of the loan without any lock-in period. And the bank or financial institution will also not be able to charge any charges or foreclosure charges.
The Reserve Bank of India has said in its draft paper that under no circumstances the lenders regulated by the RBI should levy any charge with retrospective effect at the time of foreclosure or pre-payment of those loans, which were earlier waived off by the regulated entities and about which the loan takers were not informed in advance.
As per the existing norms, certain categories of regulated entities (REs) are not allowed to levy prepayment charges on floating rate term loans sanctioned by individual borrowers for purposes other than business. "Tier-1 and tier-2 co-operative banks and entities within its ambit, other than early stage NBFCs, shall not levy any charges/penalties on prepayment of floating rate loans availed by individuals and MSE borrowers for business purposes," RBI's draft paper said. However, in case of medium enterprises, these directions will apply only up to the total sanctioned limit of Rs 7.50 crore per borrower.
