By Kshipra Petkar
In a relief to individual borrowers and medium and small enterprises, the Reserve Bank of India (RBI) issued guidelines on Wednesday saying that regulated entities cannot levy pre-payment charges on loans issued by them. These guidelines will be applicable for all loans that are sanctioned or renewed on January 1.
As per the guidelines, if the loan has been granted for purposes other than business, then regulated entities cannot levy any pre-payment charge on loans. But, if it is a business loan, then small finance banks, regional rural banks, middle layer NBFCs and tier-4 urban co-operative banks cannot levy any pre-payment charge on loans up to Rs 50 lakhs.
The guidelines had to be issued as the regulator found “divergent practices” amongst regulated entities with respect to levy of pre-payment charges in case of loans sanctioned to MSEs that led to customer grievances and disputes. It was also found that there were restrictive clauses in contracts to deter borrowers from switching to other lenders.
Accordingly, as announced in the Statement on Developmental and Regulatory Policies dated October 9, 2024, a draft circular in this regard was issued on February 21 for public consultation.
The notification also said that in the case of cash credit or overdraft facilities, pre-payment charges on closure of the facility before the due date will be levied on an amount not exceeding the sanctioned limit.