RBI Circular

Good News for Borrowers! RBI’s Zero Loan Foreclosure Charges

The Reserve Bank of India (RBI) issued a press release on February 21, 2025, inviting comments on its draft circular titled “Responsible Lending Conduct – Levy of Foreclosure Charges/Pre-payment Penalties on Loans.” This circular is regarding the elimination of prepayment penalties and foreclosure charges on floating-rate loans.

The draft circular states that stakeholders and the public can submit their comments or feedback via email by March 21, 2025. After reviewing the feedback, RBI will issue the final circular. Want to know how this will impact borrowers and lenders? Read on to understand RBI’s vision for a more borrower-friendly financial system.

What are the Key Highlights of the Proposal?

The key highlights of the proposal are as follows:

• No Foreclosure Charges

Well, lenders will not be allowed to impose charges when borrowers choose to pre-pay or close floating-rate loans.

• Coverage for Business Loans

This rule proposed by the RBI will apply to loans taken by individuals and micro and small enterprises for business purposes.

• INR 7.50 Crore is the Loan Limit

Borrowers with sanctioned loans up to 7.50 crore will be eligible.

• No Restrictions on Pre-Payment Sources

No lenders can impose penalties on the sources of how borrowers fund their pre-payment of a loan.

• Retrospective Charges not Allowed

No foreclosure charges could be introduced by banks and NBFCs at the time of loan closure if they were not previously disclosed.

Who Will Be Affected by the Circular?

Well, the proposal for the removal of penalties and foreclosure charges on floating rate loans shall be affected by the given below entities:

1. Banks

All Scheduled Commercial Banks (Except Payments Banks), Local Area Banks and Co-Operative Banks

• Financial Institutions

Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), All India Financial Institutions (AIFIs).

What are the Key Changes Proposed in the Draft?

The list of key changes proposed in the draft are as follows:

1. There shall be no prepayment charges for individuals with floating rates of loans, except for business loans.

2. There will be no charges for small businesses (MSEs) and individuals on floating rate business loans, except for Tier 1 and Tier 2 urban Cooperative Banks (UCBs) and base layer NBFCs.  

3. There shall be no penalties for early repayment of any floating rate loan, whether partial or full.

4. No minimum lock-in period for prepayment or foreclosure.

5. It is stated that the Regulated Entities (REs) must disclose charges in the Key Fact Statement Given to Borrowers.

6. The lenders cannot impose a retrospective penalty on previously undisclosed or waived prepayment charges on borrowers.

7. There shall be no foreclosure charges in case the lender initiates loan closure.

Impact on Borrowers and Lenders

Once the draft on Zero Loan Foreclosure Charges and Pre-payment Penalties is implemented, borrowers will have greater financial flexibility. Lenders will need to offer better terms without additional costs, leading to increased competition among financial institutions.

This competition will encourage lenders to provide more competitive interest rates and transparent loan terms. As a result, lenders will have to adjust their strategies to attract and retain customers, as they can no longer rely on foreclosure penalties as a safety net.

When will it get Implemented?

The RBI’s notification on Zero Loan Foreclosure Charges and Pre-payment Penalties invites feedback from stakeholders until March 21, 2025. Based on the responses and review, the Reserve Bank of India will finalize and implement the new regulations.

Once approved, this draft will bring a significant shift toward borrower-friendly lending practices, ensuring greater transparency and fairness in the financial sector.

To Wrap Up

The draft aims to eliminate foreclosure charges and prepayment penalties to protect borrowers’ interests by ensuring transparency and a customer-centric approach by lenders. It also seeks to extend these regulations to loans for MSMEs, making credit more accessible and fairer.

By implementing these measures, the RBI aims to promote responsible lending practices and prevent unfair charges, ultimately benefiting small businesses and individual borrowers.

To get insights on RBI latest notifications and updates & expert assistance in RBI services and regulatory support, visit www.enterslice.com.

Frequently Asked Questions