RBI Circular - No Penalty for Foreclosure-Prepayment of Floating Interest Rate Loans of Individual Borrowers

30.   Consumer protection is an integral aspectof financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Banks should also not take undue advantage of customer difficulty or inattention. Instead of levying penal charges for non-maintenanceof minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to Basic Savings Bank Deposit Accounts and restore the services when the balances improve to the minimum required level. Banks should not levy penal charges for non-maintenance of minimum balances in any in operative account. Banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.

What is Floating Interest Rate?

Floating interest rate as against Fixed Interest rate which remains the same over the term of the loan, varies depending upon the market conditions and is linked to base rate of the bank.

As per RBI Master Circular dated 01-07-2013 (Clause 2.4) >>

Bank shave the freedom to offer all categories of loans on fixed or floating rates,subject to conformity to their Asset-Liability Management (ALM) guidelines. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counter parties. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market bench mark rates. The floating interest rate based on external bench marks should, however, be equal to or above the Base Rate at the time of sanction or renewal. This methodology should be adopted for all new loans. In the case of existing loans of longer / fixed tenure, banks should reset the floating rates according to the above method at the time of review or renewal of loan accounts, after obtaining the consent of the concerned borrower/s

Direction of RBI to Bank not to levy Penalty on foreclosure of Floating Rate Term Loans:

RBI has vide its circular dated 7 ^th May, 2014 has bankwill not levy such penaly, relevant excerpts of the circular is as under,

“Please refer to our circular DBOD. No. Dir.BC.107/13.03.00/2011-12 dated June 5, 2012 on ‘HomeLoans- Levy of Fore-closure Charges/ Pre-payment Penalty’.

2. A reference is invited to Part B of the FirstBi-monthly Monetary Policy Statement 2014-15 announced on April 1, 2014 proposing certain measures for consumer protection. It was indicated that in the interestof their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty.Accordingly, 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.”

Download Circular dated 07-05-2014 >>