Banks, NBFCs not permitted to levy foreclosure charges or pre-penalty on loans to micro and small enterprises: RBI
Oct 9, 2024
Synopsis
Central bank governor’s announcement to cover floating rate term loans sanctioned to individual borrowers for non-business purposes.
The Reserve Bank of India (RBI) on Wednesday proposed to include loans to micro and small enterprises in the guidelines that don’t permit to levy foreclosure charges or pre-penalty, prepayment penalties on any floating rate term loan sanctioned to individual borrowers for non-business purposes.
“That is for purposes other than business. It is now proposed to broaden the scope of these guidelines to include loans to micro and small enterprises. A draft circular in this regard shall be issued for public consultation,” said the RBI Governor and MPC Chair, Shaktikanta Das, while announcing the policy decisions.
The RBI has taken several measures over the years to safeguard consumer interest. As part of these measures, banks and NBFCs are not permitted to levy foreclosure charges or pre-penalty, prepayment penalties on any floating rate term loan sanctioned to individual borrowers for non-business purposes.
Several industry leaders, association heads and experts say that the current lending practices of banks are rigid, unsupportive and often unjustified when it comes to MSMEs. They point out that this situation exists despite priority sector lending rules covering sectors that impact large sections of the population, the weaker sections and the sectors that are employment-intensive such as agriculture and micro and small enterprises.
MSMEs say banks will happily deal with them when their business is doing well; but the moment the business hits a bad patch, banks will levy penalties and charges to compound the woes of the promoters. “If you are unsatisfied, you are not even allowed to change the bank. Instruments like prepayment charges, which are generally 2-4%, are meant to prevent such a move,” Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME), had earlier told ET Digital.
In that aspect, doing away with levy of foreclosure charges or pre-penalty, prepayment penalties on any floating rate term loan will be a big relief for small firms.
Meanwhile, the RBI Monetary Policy Committee decided in a five-to-one majority to keep the repo rate — the key lending rate — unchanged at 6.5% for the tenth time in a row. The rate-setting panel unanimously changed the policy stance to neutral from focus on withdrawal of accommodation.
[The Economic Times]
