RBI Draft Norms On Foreclosure Loan Charges To Intensify Competition Among Lenders, Says Citi

Competition in lending rates by banks and non-banking financial companies is set to increase after the Reserve Bank of India announced fresh guidelines on foreclosure or prepayment penalties on loans, according to Citi Research.

In order to bring uniformity in prevalent divergent practices across lenders, RBI issued a draft circular that 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 central bank said.

While large private sector banks such as HDFC Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd. and IndusInd Bank Ltd. don't charge MSME borrowers for foreclosure of loans, individual business owners or sole proprietors are charged 2-5% foreclosure charges, Citi said.

Floating rate MSME and loan against property form as much as 27% for few NBFCs. While these norms can increase the competitive intensity for the fixed rate lenders, it can also reduce product profitability.

Bajaj Finance Ltd. charges prepayment penalty on term loans, but not on flexi loan variants. Among other NBFCs, Cholamandalam and Investment Finance Co. doesn’t charge on floating rate loans against property or secured business loans.

Shriram Finance Ltd., Aptus Value Housing Finance and Aavas Financiers primarily offer fixed-rate loans against property or business loans.

"Forfeiting foreclosure charges will not only impact fee income, but also drive higher BT-Out, intensifying competition in lending rates," the brokerage said.