The Reserve Bank of India (RBI) has given a big relief to customers who take loans from banks, housing finance companies,
and Non-Banking Financial Companies (NBFCs) during the festive season. To protect the interests of borrowers, the RBI has abolished foreclosure charges
and pre-payment penalties for closing floating rate term loans.
This means banks and NBFCs can no longer impose penalties or closure charges when customers repay their floating rate loans early.
Ban on Foreclosure Charges for Floating Rate Loans
In a recent monetary policy meeting, RBI Governor Shaktikanta Das announced that this decision is part of a series of measures aimed at protecting customers.
Under this rule, borrowers who have floating rate term loans, except those taken for business purposes, will not be subject to any foreclosure or pre-payment penalties by banks or NBFCs.
Extension of Relief to Micro and Small Enterprises
Governor Shaktikanta Das also stated that the relief would now be extended to loans provided to micro and small enterprises.
This means that these enterprises will also not be charged any foreclosure fees or pre-payment penalties on their floating rate loans.
The RBI will soon release a draft circular for public consultation on this matter.
Understanding Floating Rate Loans
Loans come with either a floating interest rate or a fixed interest rate.
A floating rate loan is linked to benchmark rates, which means that when the RBI changes its repo rate, banks adjust the interest rates on floating rate loans accordingly.
In contrast, fixed rate loans maintain the same interest rate throughout the loan tenure.
While home loans are typically offered with floating rates, loans such as gold loans, car loans, and education loans usually have fixed interest rates.
With this new decision, RBI has ensured that banks and NBFCs can no longer charge pre-payment penalties on floating rate term loans given to micro and small enterprises.
