No foreclosure, pre-payment charges on loans to MSEs

Mumbai: The Reserve Bank of India (RBI) on Wednesday asked banks and NBFCs not to levy foreclosure charges or pre-payment penalties on any floating rate term loans sanctioned to micro and small enterprises.

"With a view to safeguarding customers' interests through better transparency and customer centricity by lenders, it has been decided to broaden the scope of such regulations to cover loans to micro and small enterprises (MSEs) extended by the regulated entities of the Reserve Bank," the central bank said in a statement on developmental and regulatory policies during the review of the rate-setting panel.

A draft circular in this regard will be issued for public consultation, the regulator said. "MSEs typically take unsecured business loans, which are normally on a fixed rate, as well as loan against property, which is on floating rate," Anil Gupta, senior vice-president, co-group head, financial sector ratings, ICRA. "While positive for customers, the RBI's move will have a negative impact on the profitability of lenders, and could also potentially increase the loan prepayments and balance transfer."