Pre-payment Penalties on Loans: Banks or NBFCs will not be able to charge foreclosure charges or pre-payment penalty on closure of floating rate term loan
Loan Pre-Payment Charges: Banking sector regulator RBI has given a big gift on the festive season to those who take loans from banks, housing finance companies and NBFCs. Keeping in mind the interests of the loan taking customers, RBI has abolished foreclosure charges or pre-payment penalties on closure of floating rate term loan. Banks or NBFCs will not be able to charge penalty or closure charge from the loan taking customers on closure of floating rate loan.
Ban on banks and NBFCs charging foreclosure charges
Giving information about the decisions taken in the RBI monetary policy meeting, Governor Shaktikanta Das said that in the last several years, the Reserve Bank has taken several steps to protect the interests of customers. Under this, banks or NBFCs are not allowed to charge foreclosure charges or pre-payment penalty on closing the loan from those who take floating rate term loans under the individuals category, except business.
Relief to micro and small enterprises
The RBI governor said that now it has been decided to extend this gridline further. These gridlines will also be effective on loans given to micro and small enterprises. That is, banks and NBFCs will not be able to charge foreclosure charges or pre-payment penalty in the coming days even on floating rate term loans given to micro and small enterprises. Shaktikanta Das said, soon a draft circular will be issued for public consultation in this direction.
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What is a floating rate loan?
Banks decide the interest rates of loans in two ways. One is a floating rate loan and the other is a fixed rate loan. Floating rate loans are based on benchmark rates. For example, whenever RBI changes its policy rates i.e. repo rate, then banks also increase the interest rates on floating rate loans. And if RBI cuts, then banks reduce the interest rates on loans. But the interest rates of fixed rate loans are fixed. The interest rates fixed at the time of taking the loan remain the same till the loan is over.
Banks or NBFCs give home loans at floating rates. Whereas the interest rates of gold loans, car loans and education loans are fixed. Now RBI has decided that banks and NBFCs will not be able to charge foreclosure charges or pre-payment penalty on premature termination of floating rate term loans given to micro and small enterprises.
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