RBI's Proposal to Eliminate Foreclosure Charges on Floating Rate Loans

The Reserve Bank of India (RBI) proposes to eliminate foreclosure charges for floating rate loans extended to individuals and micro and small enterprises (MSEs). This aims to resolve inconsistent practices among regulated entities, ensuring borrowers can switch lenders without penalties for improved loan terms.

The Reserve Bank of India (RBI) has announced a proposal to eliminate foreclosure charges and pre-payment penalties on floating rate loans extended to individuals and micro and small enterprises (MSEs). The move aims to harmonize the current divergent practices among regulated entities (REs), which have often led to customer grievances and disputes.

According to the RBI's draft circular, all REs, excluding Tier 1 and Tier 2 Urban Co-operative Banks and Base Layer Non-Banking Financial Companies (NBFCs), should not impose penalties in cases of loan foreclosure or prepayment, provided they meet the specified conditions. These conditions apply to business-related loans and aim to offer more flexibility to borrowers, enabling them to switch lenders for better terms or lower interest rates.

The draft also emphasizes the need for REs to permit loan prepayment or foreclosure without a minimum lock-in period. Retroactive charges, not disclosed in advance, are also prohibited. The RBI has opened this draft for public comment, with a deadline set for March 21, 2025.

(With inputs from agencies.)