RBI Proposes End to Penalties on Floating Rate Loan Pre-Payments

The Reserve Bank of India (RBI) has proposed eliminating foreclosure and pre-payment penalties on floating rate loans for individuals and micro, small enterprises. The draft aims to promote responsible lending by removing charges for early repayment, particularly on loans up to Rs 7.50 crore for MSEs.

The Reserve Bank of India (RBI) is taking significant steps to enhance consumer protection in the lending market. In a draft proposal issued this Friday, RBI suggested discontinuing foreclosure charges or pre-payment penalties on floating rate loans granted to individuals and micro and small enterprises (MSEs), regardless of whether they have co-obligants.

Historically, certain regulated entities (REs) have not been permitted to impose these penalties on non-business loans. However, this new directive specifically aims at abolishing charges on loans taken for business purposes. The proposal outlines that, aside from Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs, no charges should be levied for loan prepayment within the aggregate sanctioned limit of Rs 7.50 crore per MSE borrower.

The RBI emphasized discrepancies among REs regarding penalty impositions, citing customer grievances. The draft circular insists on allowing loan prepayments without a minimum lock-in period and bans retrospective charges that were previously waived. The RBI has invited feedback from stakeholders, with a deadline set for March 21, 2025.

(With inputs from agencies.)