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RBI’s Proposal to Waive Foreclosure Charges for Micro and Small Enterprises (MSEs)

News in Detail

The Reserve Bank of India (RBI) released a consultation paper to waive foreclosure charges, and prepayment penalties, on loans taken by micro and small enterprises (MSEs). 

At present, banks and non-banking financial institutions (NBFCs) cannot levy the same on any term loan at floating rates of an individual borrower.

The proposals thus extend these provisions to MSEs for business purposes emphasising the “paramount importance” of “easy and affordable” financing for them.

RBI Proposal Details

Waiver of Charges

Banks and NBFCs are barred from levying foreclosure charges or prepayment penalties on floating-rate loans taken by MSEs for business purposes, extending protections previously available only to individual borrowers. This applies to MSEs borrowing up to ₹7.5 crore, excluding Tier 1/2 Primary Urban Co-operative Banks and base-layer NBFCs (asset size <₹1,000 crore).

No Lock-in Period

Lenders cannot impose minimum lock-in periods before the guidelines apply, ensuring immediate applicability.

Dual-Rate Loans

For loans combining fixed and floating rates, the waiver applies only if the loan is floating at the time of prepayment or foreclosure.

Transparency Mandate

Retroactive charges (e.g., previously waived fees or undisclosed penalties) are prohibited. Borrowers must be informed upfront of all terms.

Way Forward

MSMEs contribute about 30% of India’s GDP and employ over 110 million people. The initiative supports the government’s efforts to facilitate business operations and reduce regulatory hurdles for MSMEs. By promoting transparency and reducing costs, the RBI aims to bring more MSEs into the formal financial system, thus promoting inclusive growth.

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Source:

 THE HINDU

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