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Draft circular on Levy of Foreclosure Charges / Pre-payment Penalties on Loans

Reserve Bank of India (RBI) has issued draft circular on levy of foreclosure charges / pre-payment penalties on loans.

What issues were observed by RBI during supervisory reviews?

  • Divergent practices were observed amongst Regulated Entities (REs) with regard to levy of foreclosure charges / pre-payment penalties in case of loans sanctioned to Micro and Small Enterprises (MSEs) which lead to customer grievances and disputes. 
  • Certain REs were 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.

What are the draft revised guidelines on levy of foreclosure charges / pre-payment penalties on loans?

  • The following REs shall not levy foreclosure charges / pre-payment penalties on floating rate loans –

REs Loan to Purpose of loan
All REs Individuals, with or without co-obligants Other than business
REs, other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs Individuals and MSE borrowers, with or without co-obligants
In case of MSE borrowers, it shall be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower. 		Business

  • The above instructions shall be applicable irrespective of the source of funds used for foreclosure / pre-payment of loans, whether partial or in full.
  • Applicability of above instructions for dual / special rate (combination of fixed and floating) loans will depend whether the loan is on fixed or floating rate at the time of foreclosure / pre-payment.
  • In other 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.
  • REs shall not levy any charges / penalties in cases where foreclosure / pre-payment is effected at the instance of the RE.
  • The applicability or otherwise of foreclosure charges / pre-payment penalties shall be appropriately mentioned in the Key Fact Statement for applicable loans and advances.
  • REs shall not levy any charges retrospectively at the time of foreclosure / pre-payment of loans, which were waived off by the REs / not disclosed in advance to the borrowers, under any circumstances.


References

Reserve Bank of India. (2025, February 21). 'RBI invites comments on the draft circular on ‘Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans’'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59829

Reserve Bank of India. (2025, February 21). 'Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans'. Retrieved from https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4609


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