RBI to stop banks from levying foreclosure charges or prepayment penalties on loans. Details here

The Reserve Bank of India (RBI) has released a draft circular intended to direct banks not to levy foreclosure charges/ pre-payment on the floating rate term loans for purposes other than business to individual borrowers.

This means when a loan borrower decides to foreclose a floating rate loan or prepay it, the bank will not be permitted to impose any charge or penalty.

These rules will be part of the responsible lending conduct of banks. To make changes in the circular, RBI has invited comments and feedback by the stakeholders and members of public on the draft circular by March 21 through email.

Afterwards, a final circular will be issued after factoring in comments from public and stakeholders.

Some key provisions included in the circular:

I. Banks will allow foreclosure or pre-payment of all floating rate loans sanctioned for purposes other than business to individuals with or without co-obligant (s), without levying any charges or penalties.

II. Banks - other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs – will not levy any charges/ penalties in case of foreclosure/ pre-payment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligant (s), for business purpose.

III. In case of small and medium enterprise borrowers, these rules will be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower.

III. These instructions will be applicable regardless of the source of funds used for foreclosure/ pre-payment of loans - partial or in full.

IV. When foreclosure charges/ pre-payment penalties are charged, they will be as per the Board approved policy of the banks.

V. In such cases, foreclosure charges/ pre-payment penalties levied by the banks will be based on the outstanding amount in case of term loans and sanctioned limit in case of cash credit/ overdraft facilities.

VI. Banks are supposed to allow foreclosure or pre-payment of loans without setting any minimum lock-in period.