Pre-payment Penalties on Loans: Banks or NBFCs will not be able to charge foreclosure charges or pre-payment penalty on closure of floating rate term loans
Loan Pre-Payment Charges: Banking sector regulator RBI has given a big gift to those who take loans from banks, housing finance companies and NBFCs on the festive season. Keeping in mind the interests of the loan taking customers, RBI has abolished foreclosure charges or pre-payment penalties on closing the floating rate term loan. Banks or NBFCs will not be able to charge penalty or closure charge from the loan taking customers on closing the floating rate loan.
Ban on charging foreclosure charges by banks and NBFCs
Giving information about the decisions taken in the RBI’s monetary policy meeting, Governor Shaktikanta Das said that in the last several years, the Reserve Bank has taken several steps to protect the interests of the customers. Under this, banks or NBFCs are not allowed to charge foreclosure charges or pre-payment penalty on closure of term loans by individuals, excluding businesses, who take floating rate term loans.
Relief to Micro and Small Enterprises
The RBI Governor said that now it has been decided to extend this gridline further. These gridlines will also be effective on loans given to Micro and Small Enterprises. That is, banks and NBFCs will not be able to recover foreclosure charges or pre-payment penalty in the coming days even on floating rate term loans given to micro and small enterprises. Shaktikanta Das said, soon a draft circular will be issued for public consultation in this direction.
What is a floating rate loan?
Banks fix the interest rates of loans in two ways. One is a floating rate loan and the other is a fixed rate loan. Floating rate loans are based on benchmark rates. For example, whenever RBI changes its policy rates i.e. repo rate, then banks also increase the interest rates on floating rate loans. And if RBI cuts, then banks reduce the interest rates on loans. But the interest rates of fixed rate loans are stable. The interest rate fixed at the time of taking the loan remains the same till the loan is over.
Banks or NBFCs provide home loans at floating rates. Whereas gold loans, car loans and education loans have fixed interest rates. Now RBI has decided that banks and NBFCs will not be able to charge foreclosure charges or pre-payment penalty on premature termination of floating rate term loans given to micro and small enterprises.
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