RBI's announcement..! Now this charge will not have to be paid on closing the loan, RBI order

Loan Pre-payment Charge: Banking sector regulator RBI has given a big gift to those taking loans from banks, housing finance companies and NBFCs during the festive season. Keeping in mind the interests of loan customers, RBI has abolished foreclosure charges or pre-payment penalty on closing floating rate term loans. Banks or NBFCs will not be able to charge penalty or closure charges from loan customers on closing floating rate loans.

Ban on charging foreclosure charges by banks and NBFCs

Giving information about the decisions taken in the monetary policy meeting of RBI, Governor Shaktikanta Das said that in the last several years, the Reserve Bank has taken many steps to protect the interests of the customers. Under this, banks or NBFCs are not allowed to levy foreclosure charges or pre-payment penalty on closure of term loans by individuals (except businesses) availing floating rate term loans.

Relief to micro and small enterprises

RBI Governor said that now it has been decided to extend this gridline further. These gridlines will also be effective on loans given to micro and small enterprises. This means that in the coming days, banks and NBFCs will not be able to charge foreclosure charges or pre-payment penalties even on floating rate term loans given to micro and small enterprises. Shaktikanta Das said, soon a draft circular will be issued for public consultation in this direction.

What is a floating rate loan?

Banks decide loan interest rates in two ways. One is floating rate loan and the other is fixed rate loan. Floating rate loans are based on benchmark rates. For example, whenever RBI changes its policy rates i.e. repo rate, banks also increase the interest rates on floating rate loans. And if RBI cuts, banks reduce interest rates on loans. But the interest rates on fixed rate loans remain constant. The interest rate decided at the time of taking the loan remains the same till the loan expires.

Banks or NBFCs offer home loans at floating rates. Whereas interest rates on gold loan, car loan and education loan are fixed. Now RBI has decided that banks and NBFCs will not be able to levy foreclosure charges or pre-payment penalty on premature termination of floating rate term loans given to micro and small enterprises.