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The Reserve Bank of India has invited public response to draft rules by March 21, 2025, which is to eliminate criminal fee and pre -payment penalty on floating rate loan.
Once finally finalized, the revised criteria of RBI will apply in the final circular or applied to or subsequent eligible loans or advances.
The Reserve Bank of India (RBI) has issued draft guidelines, which propose to eliminate prepament penalty on the foreclosure fee and floating rate loan. The Central Bank has invited public reaction to the draft rules by March 21, 2025. Once finally finally finalized, the revised criteria will be specified in the final circular or after or after the eligible eligible loans or advances.
The draft guidelines extend to all scheduled commercial banks (except payment banks), local sector banks, cooperative banks, non-banking financial companies (NBFCs), Housing Finance Companies (HFCs), and All India Financial Institutions (AIFIs).
What is the draft rules?
– Except for commercial loans, no criminal or prior payment fee will be levied on the floating rate loan received by individuals.
– With exceptions for Tier 1 and Tier 2 Urban Cooperative Banks (UCB) and base layer NBFCs, there is no fee on floating rate business loans for individuals and micro and small enterprises (MSE).
– Rules apply despite funding sources and whether foreclosure or pre -payment is partial or complete.
-In other scenarios, fees will be fixed on the basis of the policy approved by the board of the respective regulated institutions (RES).
-RES should allow criminal or prior payment without applying the minimum lock-in period.
– If the criminal or pre -payment is initiated by RE, no fee will apply.
– Any applied fee should be disclosed in the major fact statement provided to the borrowers.
– The draft also clearly prohibits the fee at levied or unknown criminal or pre -paid fee.
The proposed changes aim to provide more flexibility and transparency for borrowers with floating rate loans, making it easier for them to pay their debt without excessive punishment. RBI’s move is expected to make business easier for borrowers in this segment.
What are floating rate loans?
Floating rate loans are loans where the interest rate fluctuates depending on a benchmark or reference rate, such as RBI repo rate or MCLR (marginal cost of fund-based lending rate). Unlike fixed-per loans, where the interest rate remains stable throughout the loan tenure, floating rate loans keep changing according to RBI’s interest rate decisions during monetary policy reviews.
This means that borrowers can benefit from low interest rates at the time of decline in rates, but can face high payments even when the rates increase. So far, the RBI has started cutting interest rates as it cut the major repo rate at the beginning of this month by 25 basis points.
