RBI Proposes Elimination of Pre-Payment Charges on Business Loans for Individuals and MSEs
The Reserve Bank of India (RBI) has proposed the removal of foreclosure charges and pre-payment penalties on all floating rate loans extended to individuals and Micro and Small Enterprises (MSEs), including those taken for business purposes. This initiative aims to promote responsible lending practices and provide greater flexibility to borrowers in managing their debts.
Currently, certain regulated entities are prohibited from levying such charges on floating rate term loans sanctioned to individual borrowers for non-business purposes. The new draft circular expands this prohibition to include loans taken for business purposes by individuals and MSEs. Specifically, the RBI’s proposal states that regulated entities, excluding Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer Non-Banking Financial Companies (NBFCs), shall not impose any charges or penalties in cases of foreclosure or pre-payment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligants, for business purposes.
For MSE borrowers, this directive would apply to loans with an aggregate sanctioned limit of up to ₹7.50 crore per borrower. The RBI’s supervisory reviews have highlighted inconsistent practices among regulated entities regarding the imposition of foreclosure charges on loans to MSEs, leading to customer grievances and disputes. Additionally, some entities have been found to include restrictive clauses in loan agreements to deter borrowers from switching to other lenders offering lower interest rates or better terms.
By eliminating these charges, the RBI aims to enhance transparency and fairness in the lending process, enabling borrowers to make more informed financial decisions without the burden of additional costs for early repayment. This move is expected to foster a more competitive lending environment, encouraging financial institutions to offer more favorable terms to attract and retain customers.
