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NBFCs Update- Ban of Foreclosure charges from Individual Buyers

NBFC Update- Ban of Foreclosure charges from Individual Buyers

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.

Meaning of pre-payment or foreclosure

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.

Applicability of the NBFC update

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[1] 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.

NBFC update- Relief to home loan borrowers

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.

Benefits of prepayment or foreclosure

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

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.

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