What changed
Previously, banks could levy foreclosure charges or prepayment penalties on floating rate term loans. The new circular, issued May 7, 2014, prohibits such charges on all floating rate term loans sanctioned to individual borrowers, with immediate effect.
What it means for you
Banks can no longer charge borrowers for prepaying floating rate loans, reducing borrower costs and encouraging loan prepayment. This may impact banks' interest income and prepayment risk, especially for home loans. Lenders must adjust loan agreements and systems to comply.
What you must do
- Update loan sanction letters and terms for all new floating rate term loans to individuals to remove foreclosure charges.
- Review existing loan portfolios and cease levying prepayment penalties on eligible floating rate loans.
- Communicate the change to relevant departments (retail lending, legal, compliance) and ensure system updates.
- Train frontline staff and customer service teams on the new policy to handle borrower queries.
Who it affects
All scheduled commercial banks (excluding RRBs), Individual borrowers with floating rate term loans, Retail lending departments, Compliance and legal teams
Does this ban apply to fixed rate loans?
No, the circular specifically applies only to floating rate term loans sanctioned to individual borrowers. Fixed rate loans are not covered.
When did this circular take effect?
The circular was issued on May 7, 2014, and takes effect immediately from that date.
Are regional rural banks (RRBs) exempt?
Yes, the circular is addressed to all scheduled commercial banks excluding RRBs, so RRBs are not bound by this directive.