The Reserve Bank of India (RBI), India’s central banking institution responsible for monetary policy and financial regulation, has proposed a ban on foreclosure charges and prepayment penalties for floating-rate loans availed by individuals for non-business purposes. The draft circular, released on February 23, 2025, aims to promote responsible lending and invites public and stakeholder feedback until March 21, 2025, before the final policy is implemented.
The Reserve Bank of India (RBI), the country’s central bank that regulates monetary policies and banking operations, has released a draft circular proposing a ban on foreclosure charges and prepayment penalties on floating-rate term loans taken by individuals for non-business purposes.
The RBI has invited feedback from stakeholders and the public on the draft until March 21, 2025, after which a final circular will be issued. The move aims to protect borrowers from excessive charges and promote fair lending practices across the financial sector.
Key Highlights of the Draft Circular
- No foreclosure charges or penalties will be allowed on floating-rate loans availed by individuals for non-business purposes, whether they are co-borrowers or sole borrowers.
- Businesses and MSMEs: For micro, small, and medium enterprises (MSMEs), the rule will apply only to loans up to ₹7.50 crore.
- Applicability: The proposed rules will cover all banks, except Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs.
- Foreclosure flexibility: Banks will not impose a lock-in period for loan prepayment.
- Policy-Based Charges: Where foreclosure fees are applicable, they will be determined based on the sanctioned loan amount or outstanding balance per the bank’s board-approved policy.
Impact on Borrowers and the Banking Sector
The proposed guidelines are expected to provide significant relief to borrowers, reducing the overall cost of loan repayments. However, financial institutions might need to adjust their lending strategies, as foreclosure fees have traditionally been a source of revenue.
With digital lending and flexible loan products growing in India, RBI’s initiative aligns with efforts to enhance consumer protection while ensuring that banking institutions maintain responsible lending practices.
The final circular is expected to be issued after the consultation period, factoring in feedback from banks, financial institutions, and the public.
