RBI proposes scrapping foreclosure charges on loans for borrowers and MSMEs

The Reserve Bank of India (RBI) released draft norms for prepayment penalties on loans on Friday, February 21, where it proposed to scrap the foreclosure charges on floating-rate loans for retail and MSME borrowers. Once approved, this will apply to all floating-rate loans. The central bank added that the loans granted for business purposes to individual borrowers will also be free of the existing foreclosure or prepayment penalties. 

The current penalty on personal loans for retail borrowers is 4-5 per cent of the outstanding principal. “In terms of extant instructions, certain categories of Regulated Entities (REs) are not permitted to levy foreclosure charges/ pre-payment penalties on the floating rate term loans sanctioned, for purposes other than business, to individual borrowers with or without co-obligate(s),” said the RBI in its draft norm instructions released today.