Reserve Bank of India (RBI) has released a draft circular seeking public feedback on the imposition of foreclosure charges and pre-payment penalties on loans. This move aligns with RBI’s commitment to review existing guidelines, as announced in its Statement on Developmental and Regulatory Policies of October 2024. Stakeholders, including banks, co-operative societies, and non-banking financial companies, are encouraged to submit their comments via email by March 21, 2025. The final circular will incorporate feedback received, marking a significant step towards ensuring responsible lending practices across the financial sector.
Reserve Bank of India
Press Releases
Date : Feb 21, 2025
RBI invites comments on the draft circular on ‘Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans’
In pursuance of the announcement made in the Statement on Developmental and Regulatory Policies dated October 09, 2024 regarding the review of extant regulatory guidelines on levy of foreclosure charges/ pre-payment penalties on loans, Reserve Bank has released today the draft circular in this regard.
Comments/feedback by the stakeholders and members of public on the draft circular may be submitted by March 21, 2025 through e-mail. Final circular shall be issued after considering the stakeholder/ public comments.
(Puneet Pancholy)
Chief General Manager
Press Release: 2024-2025/2231
Reserve Bank of India
Date : Oct 09, 2024
Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans
DRAFT CIRCULAR
RBI/2024-25/
DoR.MCS.REC./01.01.001/2024-25
XXXXXX XX, 2025
All Scheduled Commercial Banks (excluding Payments Banks)
All Local Area Banks
All Primary (Urban) Co-operative Banks
All State Co-operative Banks and Central Co-operative Banks
All NBFCs (including HFCs)
All India Financial Institutions (AIFIs)
Madam/ Dear Sir
Responsible Lending Conduct – Levy of Foreclosure Charges/ Pre-payment Penalties on Loans
In terms of the extant instructions, certain categories of Regulated Entities (REs) are not permitted to levy foreclosure charges/ pre-payment penalties on the floating rate term loans sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).
2. Availability of easy and affordable financing to Micro and Small Enterprises (MSEs)1is of paramount importance. However, Reserve Bank’s supervisory reviews have indicated divergent practices amongst REs with regard to levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs which lead to customer grievances and disputes. Further, certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service.
3. Based on a review of the supervisory findings and industry feedback received, it has been decided to issue revised regulations to all REs regarding levy of foreclosure charges/ pre-payment penalties on loans2. Accordingly, REs are advised to adhere to the following instructions in this regard:
3.1 REs shall permit foreclosure/ pre-payment of all floating rate loans sanctioned for purposes other than business to individuals, with or without co-obligant(s), without levying any charges/ penalties.
3.2 REs, other than Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and Base Layer NBFCs, shall not levy any charges/ penalties in case of foreclosure/ pre-payment of floating rate loans granted to individuals and MSE borrowers, with or without co-obligant(s), for business purpose. However, in case of MSE borrowers, these instructions shall be applicable up to the aggregate sanctioned limit of ₹7.50 crore per borrower.
3.3 The above instructions shall be applicable irrespective of the source of funds used for foreclosure/ pre-payment of loans, whether partial or in full.
3.4 Applicability of above instructions for dual/ special rate (combination of fixed and floating) loans will depend whether the loan is on fixed or floating rate at the time of foreclosure/ pre-payment.
3.5 In other cases, foreclosure charges/ pre-payment penalties, if charged, shall be as per the Board approved policy of the REs. However, in such cases, foreclosure charges/ pre-payment penalties levied by the REs shall be based on the outstanding amount in case of term loans and sanctioned limit in case of cash credit/ overdraft facilities.
3.6 REs shall permit foreclosure/ pre-payment of loans without stipulating any minimum lock-in period.
3.7 REs shall not levy any charges/ penalties in cases where foreclosure/ pre-payment is effected at the instance of the RE.
3.8 The applicability or otherwise of foreclosure charges/ pre-payment penalties shall be appropriately mentioned in the Key Fact Statement3 for applicable loans and advances.
3.9 REs shall not levy any charges retrospectively at the time of foreclosure/ pre-payment of loans, which were waived off by the REs/ not disclosed in advance to the borrowers, under any circumstances.
4. These instructions are issued in exercise of the powers conferred by Sections 21, 35A and 56 of the Banking Regulation Act, 1949, Sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934 and Section 30A of the National Housing Bank Act, 1987.
5. The revised instructions shall be applicable to the eligible loans/ advances which are foreclosed on or after a date to be indicated in the final circular.
6. With the issue of these instructions, the instructions contained in the circulars/ Master Directions mentioned in the Annex, issued by the Reserve Bank, shall stand repealed from the effective date of this circular. All the repealed circulars shall be deemed to have been in force during the relevant periods, prior to the coming into effect of these instructions.
Yours faithfully,
(Veena Srivastava)
Chief General Manager
Annex
List of circulars/ instructions in Master Directions repealed
| Sr. No. | Circular No. | Date | Subject |
| 1. | DBOD.No.Dir.BC.107/13.03.00/2011-12 | June 5, 2012 | Home Loans-Levy of Fore-closure Charges/ Pre-payment Penalty |
| 2. | RPCD.CO.RCBD.BC.No.84/03.03.01/2011-12 | June 15, 2012 | Home Loans – Levy of Fore – Closure Charges/ Pre-payment Penalty |
| 3. | RPCD.CO.RRB.BC.No.85/03.05.033/2011-12 | June 18, 2012 | Home Loans – Levy of Fore – Closure Charges/ Pre-payment Penalty |
| 4. | UBD.BPD.(PCB)CIR.No.41/12.05.001/2011-12 | June 26, 2012 | Home Loans-Levy of Fore-closure Charges/ Pre-payment Penalty by Urban Co-operative Banks (UCBs) |
| 5. | DBOD.Dir.BC.No.110/13.03.00/2013-14 | May 7, 2014 | Levy of Foreclosure Charges/ Pre-payment Penalty on Floating Rate Term Loans |
| 6. | UBD.CO.BPD.PCB.Cir.No.64/12.05.001/2013-14 | May 26, 2014 | Levy of Foreclosure Charges/ Pre-payment Penalty on Floating Rate Term Loans |
| 7. | RPCD.CO.RCBD.RRB.BC.No.102/07.51.013/2013-14 | May 27, 2014 | Levy of Foreclosure Charges/ Pre-payment Penalty on Floating Rate Term Loans |
| 8. | DBR.Dir.BC.No.08/13.03.00/2019-20 | August 2, 2019 | Levy of Foreclosure Charges/ Pre-payment Penalty on Floating Rate Term Loans |
| 9. | Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 | February 17, 2021 (as amended from time to time) | Paragraphs 85.6(a) and 85.7 |
| 10. | Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 | October 19, 2023 (as amended from time to time) | Paragraph 45.7.4 |
Notes:
1 As defined in Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
2 The term ‘loans’, for the purpose of this circular, shall include term loans as well as cash credit/ overdraft facilities.
3 As specified in RBI Circular DOR.STR.REC.13/13.03.00/2024-25 dated April 15, 2024 on ‘Key Facts Statement (KFS) for Loans and Advances’
