• Post last modified:September 22, 2020
  • Reading time:3 min(s) read

Of late we are receiving queries about prepayment or foreclosure charges in respect of Retail floating rate Term Loans like a Car Loan, Housing Loan, Vehicle Loan, Personal Loan, etc.

You may submit your financial queries here and we’ll answer them

Many borrowers when approached their banks/financial institutions for full payment of their loans were asked to pay hefty foreclosure charges. Due to low awareness of guidelines many borrowers end up paying the charges or are forced to continue the loans.

So today, we’ll discuss Reserve Bank of India (RBI) guidelines in respect of the prepayment of retail term loans.

In terms of RBI Circular no DBOD. Dir.BC.No.110/13.03.00/2013-14 dated 07.05.2014, it has been advised that banks shall not charge prepayment charges on floating rate home loans/term loans.

The circular reads as under:

“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.”

In terms of RBI Circular no DBR.Dir.BC.No.08/13.03.00/2019-20 dated 02.08.2019, RBI has clarified that no prepayment charges shall be charged by banks on any floating rate term loan to individuals. The circular is applicable for all banks excluding RRBs.

The circular reads as under:

“It is clarified that banks shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).”

In terms of RBI Circular no DNBR (PD) CC.No.101/03.10.001/2019-20 dated 02.08.2019, RBI has clarified that no prepayment charges shall be charged by NBFCs on any floating rate term loan to individuals.

The Circular reads as under:

It is clarified that NBFCs shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s).

What is a Floating Rate Term Loan?

As per RBI, Floating rate loan means a loan on which interest rate does not remain fixed during the tenor of the loan.

Hence, if your lender is asking for foreclosure charges on your floating rate retail term loan you can deny the charges as per RBI guidelines. The link to RBI circulars is available under “Sources”.

Some of the top retail lenders are State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank, HDFC Limited, IDFC First Bank, DCB Bank, Indiabulls housing finance, & Bajaj Finance.

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Sources

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8868&Mode=0

https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11646#:~:text=In%20this%20connection%2C%20it%20is,co%2Dobligant(s).

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11647&Mode=0#:~:text=It%20is%20clarified%20that%20NBFCs,co%2Dobligant(s).

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10295&Mode=0

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Gurjeet Singh
Gurjeet Singh
28 days ago

An issue you must take up.
12% p.a. compounded quarterly.
But in case of monthly rests is it 1% per month compounded monthly or a little less such that it equals 3% per quarter compounded quarterly?

Jaspreet
Jaspreet
Reply to  Gurjeet Singh
19 days ago

Thanks for the suggestion dear and we regret for late reply due to some technical issue. We will soon try to take up the issue.