Comprehensive Guide on Foreclosure Charges, waiver & refund.
1) What Are Foreclosure Charges, and How Do They Differ from Takeover Charges and Prepayment Penalties?
2) Is It Justified to Take Foreclosure Charges?
3) How Much Can Banks Charge for Foreclosure or Prepayment?
4) What Is the Difference Between Floating Rate Loans and Fixed Rate Loans?
5) RBI Guidelines on Foreclosure Charges for MSME Loans
6) Is there an RBI Circular Prohibiting Foreclosure Charges for MSMEs?
7) Are Foreclosure Charges Applicable to Non-Fund-Based Limits?
8) RBI Guidelines on Foreclosure Charges for Individual Borrowers
9) Viewpoints of Different Banks on Foreclosure Charges
10) How Can Borrowers Waive or Refund Foreclosure Charges?
1) What Are Foreclosure Charges, and How Do They Differ from Takeover Charges and Prepayment Penalties?
Foreclosure charges are fees imposed by a bank when a borrower repays the full loan amount before the end of the loan tenure, effectively closing the loan account. These charges compensate the lender for the loss of future interest income.
Key Differences:
| Aspect | Foreclosure Charges | Takeover Charges | Prepayment Penalties |
| Definition | Fee for repaying the entire loan early. | Fee for transferring the loan. | Fee for partial early repayments. |
| Scope | Full loan repayment and closure. | Loan balance transfer. | Partial repayment while continuing. |
| Purpose | Compensates for interest loss. | Compensates for business loss. | Compensates for partial interest loss. |
| Common Loans | Home, personal, business loans. | Home and business loans. | Home (fixed-rate), car, and business loans. |
2) Is It Justified to Take Foreclosure Charges?
The justification for loan pre-closure charges is a contentious issue:
- In Favor:
- Compensates the lender for interest loss.
- Discourages frequent loan refinancing.
- Against:
- Places an unfair financial burden on borrowers.
- Contradicts the principle of financial freedom.
3) How Much Can Banks Charge for Foreclosure or Prepayment?
Although there’s no prescribed upper limit, foreclosure fees typically range from 1% to 6% of the outstanding loan amount.
As per RBI Circular No. RBI/2023-24/53 (DoR.MCS.REC.28/01.01.001/2023-24) dated August 18, 2023, banks are advised to ensure that penalties are reasonable, commensurate with non-compliance, and not used as a revenue enhancement tool.
4) What Is the Difference Between Floating Rate Loans and Fixed Rate Loans?
- Floating Rate Loans:
Interest rates vary over time, aligning with benchmark rates like the RBI repo rate or MCLR. E.g., home loans. - Fixed Rate Loans:
Interest rates remain constant throughout the tenure, offering predictable repayments. E.g., car loans, fixed personal loans.
However, some banks may impose cancellation fees for early termination, depending on their internal policies.
5) RBI Guidelines on Foreclosure Charges for MSME Loans
RBI guidelines for MSME foreclosure charges under the BCSBI Code of Conduct stated that member banks should avoid levying foreclosure charges on MSME loans to promote transparency and fairness. However, with the dissolution of BCSBI, member banks are no longer obligated to adhere to these guidelines, and non-member banks or NBFCs, which were not bound by the Code, continue to impose foreclosure charges based on the borrower’s sanction letter.
In the MPC meeting on 09.10.2024, the former RBI Governor, Shaktikanta Das, announced that foreclosure and prepayment charges on MSME loans by banks and NBFCs would be reviewed, and a public draft would be issued. However, no such RBI circular for MSME loans has been released to date, leaving banks and NBFCs free to charge foreclosure fees as per their terms.
6) Is there an RBI Circular Prohibiting Foreclosure Charges for MSMEs?
No, there is no RBI circular on MSME loan foreclosure charges explicitly prohibits such charges. Banks and NBFCs continue to levy fees based on their policies.
7) Are Foreclosure Charges Applicable to Non-Fund-Based Limits?
Non-fund-based limits, such as guarantees or letters of credit, typically do not incur loan prepayment penalties because:
- There’s no principal repayment involved.
- Fees are earned upfront instead of interest.
8) RBI Guidelines on Foreclosure Charges for Individual Borrowers
As per RBI Circular RBI/2019-20/29, banks are prohibited from charging foreclosure charges or prepayment penalties on floating rate term loans sanctioned to individual borrowers for non-business purposes. This clarification is built on:
- Circular DBOD.No.Dir.BC.107/13.03.00/2011-12 (June 5, 2012)
- Circular DBOD.Dir.BC.No.110/13.03.00/2013-14 (May 7, 2014)
These provisions cover foreclosure charges for home loans, personal loans, and all other floating rate loans taken for personal use other than business.
9) Viewpoints of Different Banks on Foreclosure Charges
Only a few banks, like ICICI Bank Ltd and Central Bank of India, have adopted customer-friendly policies, avoiding MSME loan foreclosure charges. Most banks, however, continue to impose these fees for floating rate & fixed-rate loans for non-individual borrowers.
10) How Can Borrowers Waive or Refund Foreclosure Charges?
At IBRLIVE India Private Limited, we specialize in helping borrowers secure waivers or refunds of foreclosure charges, even when such charges are mentioned in the sanction letter. Our team includes experienced bankers who are well-versed in the regulatory framework and legal provisions surrounding these charges.
We adopt a structured and legal approach, knowing exactly how to proceed and whom to approach in the waiver or refund process. Over the years, we have successfully handled numerous cases across India, including disputes involving housing loan foreclosure charges, mortgage loan prepayment penalties, and foreclosure charges on MSME loans, ensuring relief for our clients and saving them substantial amounts.
If you are facing foreclosure charges, connect with us for professional guidance and effective solutions.
Conclusion: The banking culture in India often presents a significant hurdle for corporate clients looking to switch their credit facilities to new banks. The threat of heavy foreclosure charges imposed by existing bankers creates an environment where clients feel compelled to stay, even when confronted with inadequate services and non-competitive pricing. IBRLIVE India Private Limited, a corporate financial consultancy, aims to break this pattern by advocating for clients and facilitating a smooth transition process without incurring foreclosure charges. Through their expertise, negotiation skills, and representation, IBRLIVE empowers clients to explore better banking options, save money, and unlock their full financial potential.