The Reserve Bank of India (RBI), in its draft circular issued today, said lenders shall not levy any charges or penalties in case of foreclosure or pre-payment of floating rate loans granted to individuals and micro and small entities (MSE) for business purposes. However, in case of MSE borrowers, these instructions would be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower. These directions will be implemented from the indicative date in the final circular, and the regulator has sought comments from the public by March 21, 2025.

“Availability of easy and affordable financing to MSEs is of paramount importance. However, Reserve Bank’s supervisory reviews have indicated divergent practices amongst REs (registered entities or banks) with regard to levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs, which lead to customer grievances and disputes,” the RBI said.

“Further, certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service,” it added.

Banks must provide individual borrowers the option to foreclose or prepay all floating rate loans, extended for purposes other than business, without any penalty.

These directions will be applicable irrespective of the source of funds used for foreclosure/ pre-payment of loans, whether partial or in full. Applicability of instructions for dual/ special rate (combination of fixed and floating) loans will depend on whether the loan is on fixed or floating rate at the time of foreclosure/ pre-payment.

“In other cases, foreclosure charges/ pre-payment penalties, if charged, shall be as per the Board approved policy of the REs. However, in such cases, foreclosure charges/ pre-payment penalties levied by the REs shall be based on the outstanding amount in case of term loans and sanctioned limit in case of cash credit/ overdraft facilities. REs shall permit foreclosure/ pre-payment of loans without stipulating any minimum lock-in period,” the central bank said.

The banks should clearly lay down any foreclosure charges in the key fact statement extended during the disbursement of loan. Lenders shall also not levy any charges retrospectively at the time of foreclosure, which were waived off by the bank or not disclosed in advance to the borrowers, under any circumstances.