CA Rushabh Shah
The RBI, vide its circular RBI/2013-14/ 582 DBOD. Dir. BC. No. 110 /13.03.00/2013-14 dated the 7th of May 2014 has advised all the banks that from immediate effect, there shall be no prepayment penalties / foreclosure charges to individual borrowers for all the floating rate term loans. However, it can be clearly inferred from the notification that business / corporate borrowers do not fall under this purview and hence, there is no benefit available to them.
This comes as a relief to individual borrowers as it not allows them avail the benefits of low rate of interest in the market from bankers. This notification comes a few days after the RBI released the First Bi-Monthly Monetary Policy Statement for 2014 – 15 on April 1, 2014 wherein they specifically mentioned that consumer protection is an integral part of financial inclusion. With this notification, the RBI has indicated that banks cannot take any undue benefit of customers difficulty or inattention. RBI has thus initiated steps towards framing comprehensive customer protection regulations based on domestic experience and global best practices.
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Relevant RBI Notification is as follows :-
RBI/2013-14/582
DBOD. Dir.BC.No.110/13.03.00/2013-14
May 7, 2014
All Scheduled Commercial Banks
(Excluding RRBs)
Dear Sir/Madam
Levy of foreclosure charges/pre-payment penalty on Floating Rate Term Loans
Please refer to our circular DBOD. No. Dir.BC.107/13.03.00/2011-12 dated June 5, 2012 on ‘Home Loans- Levy of Fore-closure Charges/ Pre-payment Penalty’.
2. A reference is invited to Part B of the First Bi-monthly Monetary Policy Statement 2014-15 announced on April 1, 2014 proposing certain measures for consumer protection. It was indicated that in the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Accordingly, it is advised that banks will not be permitted to charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect.
Yours faithfully,
(Prakash Chandra Sahoo)
Chief General Manager
