There is a big good news for MSME sector in India. The RBI is considering a big change in the loan repayment related to MSME. RBI may allow banks to remove prepayment charges on loans related to MSMEs. While some banks do not impose foreclosure charges on Micro, Small, and Medium Enterprises (MSMEs), a few banks impose such charges. Typically, these charges range between 2% to 5% of the pre-payment amount, excluding taxes. These charges are generally seen in private sector banks.
Relief for Micro and Small Enterprises (MSEs)
Micro and Small Enterprises (MSEs) will now be able to prepay loans without paying foreclosure penalties. This move provides relief to businesses that had previously been subject to these charges. This will provide the much needed relief to MSME sector.
Many small enterprises have voiced concerns over the foreclosure charges, which they view as a tool for lenders to extract higher interest rates. In one notable case, a business was asked to pay ₹14 lakh in foreclosure charges and ₹54 lakh in non-compliance fees for a credit arrangement of ₹3.5 crore.
Currently, banks and Non-Banking Financial Companies (NBFCs) are not permitted to levy foreclosure charges or prepayment penalties on floating-rate term loans sanctioned to individual borrowers for non-business purposes. The Reserve Bank of India (RBI) has now proposed to extend these guidelines to include loans to micro and small enterprises.
RBI’s Statement on the New Proposal
“To protect customer interests through greater transparency and customer-centric lending practices, it has been decided to extend these regulations to cover loans to Micro and Small Enterprises (MSEs) provided by RBI-regulated entities. A draft circular will be issued for public consultation,” stated the RBI.
