Why in News?
The Reserve Bank of India (RBI) floated a consultation paper seeking to waive foreclosure charges, and prepayment penalties, on loans taken by micro and small enterprises (MSEs).
- Recent Changes - RBI has proposed that banks and NBFCs must not levy foreclosure charges or prepayment penalties on loans taken at floating rates by MSEs for business purposes.
- At present, the provision only exists for loans taken by individuals for purposes other than business.
- The proposed regulation thus extends the purview of the guideline.
- Eligibility - This shall apply to all MSE borrowing up to Rs.7.5 crore
- Barring an exception for Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and base layer NBFCs, that is, those with asset sizes of below Rs.1,000 crore.
- RBI also underlines that banks and NBFCs cannot stipulate any minimum lock-in period for the proposed guidelines to become applicable.
- Furthermore, it underlines that regulated entities cannot levy any retrospective charges which were waived off earlier and/or not disclosed in advance to the borrowers.
- Objectives - The primary objective of the proposed measures is to provide for easy and affordable financing to MSMEs.
- The waiver would bring more borrowers into the formal system (of credit).
- It mitigates the risk of hidden charges and offers better ability for MSMEs to plan their cash flows and incentivises borrowers to repay.
- The proposed measures are meant to help small businesses to clear their debts without penalties.
Reference
The Hindu | RBI on foreclosure charges
