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.
