Banks to not levy foreclosure charges/ pre-payment penalties on any floating term loan sanctioned to individuals for purposes other than business. Earlier it was only on housing loans. Gist of RBI notification dated 2nd August, 2019 follows
Please refer to our circulars DBOD.No.Dir.BC.107/13.03.00/2011-12 dated June 5, 2012 and DBOD.Dir.BC.No.110/13.03.00/2013-14 dated May 7, 2014, in terms of which banks are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all floating rate term loans sanctioned to individual borrowers.
2. In this connection, it is clarified that banks shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).
RBI has vide its circular dated 7th May 2014 immediately banned the foreclosure charges/ pre-payment penalty that was being levied by banks and financial institutions on pre-payment of loans by borrowers. This will be brought into effect immediately but will cover only loans with floating rate of interest and that too only for individual borrowers.
Not clear why RBI has left our the fixed interest rate borrowers and commercial entities who borrow monies.
It is a case of too little, too late from RBI.
RBI should levy a fine of a few thousand crores on all the banks and financial institutions who have been levying these charges on borrowers for all these years and reimburse to the borrowers who have been so effected.
The copy of the circular can be found here.