Micro and Small Enterprises (MSEs) will now be able to prepay loans without paying foreclosure penalty.

Banks and NBFCs are not permitted to levy foreclosure charges or prepayment penalties on any floating rate term loan sanctioned to individual borrowers for non-business purposes. RBI has is now proposed to broaden the scope of these guidelines to include loans to micro and small enterprises.

“With a view to safeguard customers’ interest 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. A draft circular in this regard shall be issued for public consultation,” RBI said.

According to Anil Gupta, co-group head of financial sector ratings at ICRA, micro and small enterprisestypically take unsecured business loans, which are normally on a fixed rate, as well as loan against property, which is on floating rate. “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,” he said.

Many small enterprises have complained about the charges which have become a tool to extract higher interest rates. In one case, foreclosure charges of ₹14 lakh and non-compliance charges of ₹54 lakh were asked for a credit arrangement of ₹3.5 crore.

“FISME has been raising the issue very strongly. Therefore, we welcome RBI Governor’s announcement that it is proposed to do away with foreclosure charges for Micro and Small Enterprises (MSEs) also. However, we could not understand why even this proposed policy is being put for public discussion. RBI should have issued the circular right away,” said Anil Bhardwaj, Secretary General at FISME.

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