RBI Issues Draft Circular For Foreclosure Charges On Loans

The Reserve Bank of India has issued a draft circular that will change the way lenders charge borrowers on foreclosure or prepayment penalties on loans. The central bank has asked for feedback on the draft circular by March 21.

According to the draft guidelines, lenders will not levy any foreclosure charges on all floating rate loans to retail and micro, small and medium enterprises borrowers.

Lenders will also not charge foreclosure or prepayment penalties to individual borrowers for loans sanctioned for business purposes.

For particularly MSME borrowers, no prepayment or foreclosure penalties will be charged for loans up to Rs 7.5 crore. The applicability of these instructions for dual or special rates, which are a combination of fixed and floating rate loans, will depend on whether the loan is on a fixed or floating rate at the time of foreclosure, the RBI said.

Further, lenders cannot stipulate a minimum lock-in period for loans to retail and MSME borrowers.

The central bank also said that in cases where a lender has charged a foreclosure or prepayment penalty, it has to be a board-approved policy.

"However, in such cases, foreclosure charges/pre-payment penalties levied by the REs shall be based on the outstanding amount in the case of term loans and the sanctioned limit in the case of cash credit/overdraft facilities," the RBI said.

The applicability or otherwise of foreclosure charges or prepayment penalties must be appropriately mentioned in the Key Fact Statement for applicable loans and advances.

Under any circumstances, lenders must not levy any charges retrospectively at the time of foreclosure of loans that were waived off by them or not disclosed in advance to the borrowers.

The revised guidelines will be applicable to the eligible loans that are foreclosed on or after a date to be indicated in the final circular.

On October 9, 2024, the RBI had said that it would release a draft circular on foreclosure charges of loans as banks and non-banking financial companies are not allowed to levy foreclosure charges or pre-payment penalties on any floating rate term loan sanctioned to individual borrowers with or without co-obligants for purposes other than business.

This is to safeguard customers' interests through better transparency and customer centricity by lenders. The circular also aims to broaden the scope of such regulations to cover loans to MSMEs.