The RBI last Friday released the draft norms proposing to scrap the foreclosure charges and pre-payment penalties on floating-rate loans for individuals and MSE borrowers.
Mumbai: The Reserve Bank of India’s (RBI) proposal to scrap foreclosure or prepayment charges on floating-rate loans for individuals and microand small enterprises (MSE) borrowers if implemented is likely to have a material impact on the income streams of non-banking financial companies (NBFCs) and banks, particularly in terms of their fee-based income derived from foreclosure penalties, global financial services firm Morgan Stanley said in its report. Moreover, it may also increase loan churn as borrowers could be incentivized to switch lenders more frequently in search of better rates, it added.
MSEs typically take unsecured business loans, which are normally on a fixed rate, as well as loan against property, which is on floating rate. While positive for customers, the RBI's move will have a negative impact on the profitability of lenders, and could also potentially increase the loan prepayments and balance transfer, an analyst said.
The move is expected to particularly affect NBFCs with a significant proportion of floating-rate loans against property (LAP) in their portfolios. Among the key players with high exposure to these loans are Aditya Birla Capital (ABCL), PNB Housing Finance (PNBHF), Cholamandalam Investment and Finance (Chola), Aavas Financiers, and Home First Finance, Morgan Stanley said.
The RBI last Friday released the draft norms proposing to scrap the foreclosure charges and pre-payment penalties on floating-rate loans for individuals and MSE borrowers. Once approved, this will apply to all floating-rate loans. The central bank added that the loans granted for business purposes to individual borrowers will also be free of the existing foreclosure or prepayment penalties. Foreclosure charges range between 2 per cent to 5 per cent.
The central bank said that its supervisory reviews have indicated divergent practices amongst lenders with regard to levy of foreclosure charges/ pre-payment penalties in case of loans sanctioned to MSEs which lead to customer grievances and disputes. The central bank has invited feedback from stakeholders until March 21, 2025.
