RBI Proposes No Foreclosure Penalty On MSE Loans
Micro and Small Enterprises (MSEs) to benefit as RBI moves to eliminate prepayment penalties on floating rate loans
Micro and Small Enterprises (MSEs) will soon be able to prepay loans without incurring foreclosure penalties, according to a new proposal by the Reserve Bank of India (RBI). This move is set to benefit MSEs, providing them with more flexibility in loan repayment.
Currently, banks and non-banking financial companies (NBFCs) are prohibited from charging foreclosure fees on floating rate term loans granted to individual borrowers for non-business purposes. The RBI now aims to extend this regulation to cover loans provided to MSEs.
“With a view to safeguard customers’ interests through better transparency and customer centricity by lenders, it has been decided to broaden the scope of such regulations to cover loans to Micro and Small Enterprises (MSEs) extended by the Regulated Entities of the Reserve Bank. A draft circular in this regard shall be issued for public consultation,” the RBI stated.
Anil Gupta, Co-Group Head of Financial Sector Ratings, Icra, noted that most MSEs typically take unsecured business loans, which often have fixed rates, as well as loans against property, which usually carry floating rates. “While positive for customers, the RBI’s move will have a negative impact on the profitability of lenders, and could also increase loan prepayments and balance transfers,” he added.
Small enterprises have long expressed dissatisfaction with foreclosure charges, which many view as a way for lenders to extract higher interest payments. In one instance, a small business was asked to pay Rs 14 lakh in foreclosure charges and Rs 54 lakh in non-compliance fees for a Rs 3.5 crore loan arrangement.
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME), praised the RBI’s proposal but questioned the need for public consultation. “We welcome the RBI Governor’s announcement to eliminate foreclosure charges for MSEs. However, we don't understand why the policy is being put up for public discussion. The RBI should have issued the circular immediately,” Bhardwaj said.
