RBI issues draft norms on loan foreclosure charges, pre-payment penalties
This story was originally published at 20:41 IST on 21 February 2025
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--RBI issues draft norms on loan foreclosure charges, pre-payment penalties
--RBI invites comments on loan foreclosure charges draft norms by Mar 21
NEW DELHI – The Reserve Bank of India on Friday issued the draft norms related to the levy of foreclosure charges and pre-payment penalties on loans, inviting comments on the same by Mar. 21. The central bank said that its supervisory reviews had revealed "divergent practices" by the entities it regulates with regard to how they levy foreclosure charges and pre-payment penalties for loans made to micro and small enterprises. Further, certain lenders include restrictive clauses in their loan agreements that deter borrowers from switching to another lender.
"Based on a review of the supervisory findings and industry feedback received, it has been decided to issue revised regulations to all REs (regulated entities) regarding levy of foreclosure charges/pre-payment penalties on loans," the RBI said.
As per the draft norms, lenders must allow foreclosure and pre-payment of loans without requiring a minimum lock-in period. The foreclosure charges and pre-payment penalties can also not be levied in cases where the prepayment is done at the instance of the lender. Lenders must also permit foreclosure and pre-payment of all floating rate loans sanctioned for purposes other than business to individuals without levying any charges.
"REs (regulated entities), other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs (non-bank financial companies), shall not levy any charges/penalties in case of foreclosure/pre-payment of floating rate loans granted to individuals and MSE (Micro and Small Enterprises) borrowers, with or without co-obligant(s), for business purpose. However, in the case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of INR 75 million per borrower," the draft circular said.
In cases where foreclosure charges are imposed, they must be as per a board-approved policy and based on the outstanding amount in case of term loans and sanctioned limit in case of cash credit or overdraft facilities.
The RBI said the revised norms will be applicable to foreclosed loans on or after a date that will be mentioned in the final circular. End
Reported by Siddharth Upasani
Edited by Saji George Titus
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