New Delhi: In a move aimed at enhancing borrower flexibility, the Reserve Bank of India (RBI) has proposed eliminating foreclosure charges and prepayment penalties on floating rate loans. This draft guideline, open for public feedback until March 21, 2025, targets loans taken by individuals and Micro and Small Enterprises (MSEs) for business purposes. The RBI’s initiative comes as part of broader efforts to streamline lending practices and reduce borrower grievances.
The draft rules apply to a wide range of financial institutions, including Scheduled Commercial Banks, Local Area Banks, Co-operative Banks, Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and All India Financial Institutions (AIFIs). Notably, Tier 1 and Tier 2 Urban Cooperative Banks and base layer NBFCs are exempt from these changes.
Key aspects of the draft guidelines include the prohibition of foreclosure or prepayment charges on floating rate loans for individuals and MSEs, except in specific cases involving certain cooperative banks and NBFCs. Additionally, lenders must allow borrowers to foreclose or prepay loans without imposing a minimum lock-in period. If the lender initiates the foreclosure or prepayment, no charges will be applicable. Any applicable fees must be clearly disclosed in the Key Fact Statement provided to borrowers. The RBI also prohibits retrospective charges on waived or undisclosed fees.
Floating rate loans, which have interest rates that fluctuate based on benchmarks like the RBI’s repo rate or the MCLR, will be particularly affected. This change is expected to benefit borrowers by allowing them to switch lenders more easily in search of better terms without facing penalties.
