Select Your Location
The Reserve Bank of India released a new update related to NBFC. The central bank restricted NBFCs from charging foreclosure or pre-payment penalties from individual buyers. According to the fair practice code, NBFCs can’t charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to the individual borrowers. In this article, we shall discuss this NBFC update.
Table of Contents
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan- As per Wikipedia.
However, the differentiating factor is that pre-payment refers to early payment of scheduled instalments, whereas foreclosure refers to early payment of the entire outstanding amount leading to early closure of the loan term. Moreover, pre-payment is partial in nature, and foreclosure is the closure of the loan account before the deadline or the due date.
This change will apply to all kinds of NBFCs, including systemically important and also non-systemically important NBFCs who are into the business of lending to individuals. However, NBFCs engaged in lending to non-individuals only don’t require complying with this requirement.
The coverage of this update extends to both Deposit-taking and non-deposit taking NBFC. The related rules and provisions mandatory for the implementation of the same are duly updated.
Back in 2014, the RBI put restrictions on commercial banks from charging foreclosure fees or penalties from individual borrowers with mortgage loans.
RBI put similar restrictions on banks and Housing Finance Companies as well. Banks are not allowed to charge foreclosure charges/ pre-payment penalties on home loans / all floating rate term loans, for purposes apart from business, sanctioned to individual borrowers. Housing Finance Companies are not allowed to charge foreclosure charges/ pre-payment penalties in case of foreclosure of floating interest rate housing loans or housing loans on fixed interest rate basis that are pre-closed by borrowers out of their own sources.
Borrowers can choose to pre-pay due to their personal obligations/burden, or if they obtain their funds that were stuck earlier, or by availing from a cheaper source to repay. The waive off of penalty charges could be a sign of relief to them as they would get out of the obligation of an existing loan arrangement by paying off early and save the compounding interests. It will also help them explore from other options available in the market.
There are certain NBFCs that charge foreclosure penalties in the range of 1 to 4 per cent on the outstanding principal. For instance, if you have a home loan of 50 lakh rupees from an NBFC, with a tenor of 20 years and 9.5 % floating interest rate, then your EMI will be 46,607 rupees. You continued to pay EMIs for 10 years, i.e., 120 months. After these years of paying your EMIs, you choose to foreclose this outstanding loan. So, in 121st month, you will have to pay a foreclosure amount of approx. 36.01 lakh Rupees, which includes outstanding principal and foreclosure penalty charges. The penalty charges shall range between 1,699 to 6,797 rupees.
Now, the NBFCs can’t charge this pre-payment penalties or foreclosure charges from individual borrowers after this NBFC update.
Whether you decide to prepay or foreclose the loan, it definitely benefits you in the longer run. Both these benefit tons of borrowers who can use any surplus money they come across to wind up existing loans and get some respite from the high interest amount towards their loans. That too, in India, where the idea of being indebted is generally seen with some amount of abomination, closing down their loan account is greatly favoured.
This NBFC update, which will take away the income line for these players, comes at a time when NBFCs are struggling with a slew of issues, starting with liquidity crisis. The RBI has blamed asset liability mismatch for the issues.
Read our article:Updated ECB Norms for NBFC
Akash Dubey is a Law Graduate and works as an
Advisor at Enterslice. He is proficient in Legal
and Financial Advisory. His expertise in the
skills of Legal and Financial Research is an aid
to his strengths as an Advisor.
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Every assessee in India is obligated to file an income tax return and make the timely payment o...
In the recent past, India has seen burgeoning demand for internet and smartphones. The rapid ri...
The Securities and Exchange Board of India (SEBI), the capital markets regulator, has recommend...
The objective of the enactment of the Prevention of Money-laundering Act, 2002, i.e. PMLA (the...
Tax planning is a continuing effort and a management strategy for ensuring the minimization of...
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Are you human?: 3 + 9 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
The Ministry of Corporate Affairs (MCA) in its notification dated 24th February 2020 has notified that the eligibil...
05 Mar, 2020
Non-banking finance companies are essential to the expansion of the economy since they give entrepreneurs loans to...
14 Apr, 2023
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!