RBI Bars Banks from Charging Prepayment Fee on Floating Rate Term Loans

The Reserve Bank of India (RBI) on Wednesday barred banks from levying foreclosure charges or pre-payment penalties on individual borrowers for all floating rate loans with immediate effect.

"In the interest of 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," the RBI said in a statement.

In its annual policy review on April 1, the central bank had proposed a ban on prepayment penalties. "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," the central bank said.

The RBI had in 2012 abolished pre-payment penalties on floating rate home loans, which is a major chunk of retail loans.

Some customers foreclose their loans by switching to banks who offer loans at lower rates.