RBI pushes for fairer lending: Prepayment penalties on floating rate loans could be scrapped

The Reserve Bank of India (RBI) on Friday released draft guidelines proposing the removal of foreclosure charges and prepayment penalties on floating rate loans, inviting public comments by March 21, 2025. Once finalised, the revised rules will apply to eligible loans or advances foreclosed on or after a date specified in the final circular.

The draft proposal applies to all Scheduled Commercial Banks (excluding Payments Banks), Local Area Banks, Co-operative Banks, Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and All India Financial Institutions (AIFIs).

Key provisions in the draft rules include:

• Removal of foreclosure or prepayment charges on floating rate loans to individuals, with the exception of business loans.
• No charges on floating rate business loans to individuals and micro and small enterprises (MSEs), except for Tier 1 and Tier 2 Urban Cooperative Banks (UCBs) and base layer NBFCs.
• The rules apply regardless of the funding source, whether for partial or full foreclosure or prepayment.
• In other cases, charges or penalties will follow the Board-approved policy of the respective regulated entities (REs).
• REs must allow foreclosure or prepayment without a minimum lock-in period.
• No charges will apply if foreclosure or prepayment is initiated by the RE.
• Any applicable charges must be disclosed in the Key Fact Statement provided to borrowers.
• The draft also prohibits any retrospective charges on waived or undisclosed foreclosure or prepayment fees.

The proposed changes aim to provide greater flexibility and transparency for borrowers with floating rate loans, making it easier for them to pay off their loans without incurring excessive penalties. The RBI’s move is expected to enhance the ease of doing business for borrowers in this segment.