The Reserve Bank of India (RBI) has proposed fresh guidelines for all lenders with regard to the levy of foreclosure charges and pre-payment penalties on loans, according to a draft circular issued on February 21.
The central bank wants all regulated entities (REs) to eliminate foreclosure charges or pre-payment penalties on all floating rate loans, including those for business purposes, availed by individuals and micro and small enterprises (MSEs).
Stressing responsible lending conduct by lenders, the RBI’s draft circular said that as per the extant instructions, certain categories of lenders are not permitted to levy foreclosure charges or pre-payment penalties on floating rate term loans sanctioned for purposes other than business, to individual borrowers with or without co-obligants.
‘Divergent practices’ concerning levy of foreclosure charges
The availability of easy and affordable financing to Micro and Small Enterprises (MSEs) is of paramount importance, the RBI emphasized.
The draft circular further said that the RBI’s supervisory reviews have indicated divergent practices among REs with regard to the levy of foreclosure charges or pre-payment penalties on loans sanctioned to MSEs, leading to customer grievances and disputes. “Additionally, some REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching to another lender for lower interest rates or better service terms.”
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Revised regulations on foreclosure charges
Based on a review of supervisory findings and industry feedback, revised regulations are being issued for all REs regarding the levy of foreclosure charges, and pre-payment penalties on loans, the circular said.
The RBI draft circular suggests lenders permit foreclosure, and pre-payment of all floating rate loans sanctioned for purposes other than business to individuals, with or without co-obligants, without levying any charges, or penalties.
Loans for business purposes
Regulated entities, “other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs, shall 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 purposes. However, in the case of MSE borrowers, these instructions shall be applicable up to an aggregate sanctioned limit of ₹7.50 crore per borrower.”
These instructions shall apply irrespective of the source of funds used for foreclosure/ pre-payment of loans,
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