Sun Mar 02 05:03:00 UTC 2025: **RBI Proposes to Eliminate Foreclosure Charges for MSME Loans**

**Mumbai, March 2, 2025** – The Reserve Bank of India (RBI) has proposed eliminating foreclosure charges and prepayment penalties on floating-rate loans for micro, small, and medium enterprises (MSMEs). This move aims to provide easier and more affordable financing for this crucial sector.

Currently, such waivers are only applicable to individual borrowers for non-business purposes. The RBI’s consultation paper, released on February 21st and open for comment until March 21st, seeks to extend this benefit to MSMEs with loans up to ₹7.5 crore. The proposal excludes Tier 1 and Tier 2 Primary (Urban) Co-operative Banks and base-layer NBFCs (those with assets under ₹1,000 crore). The RBI also emphasizes that no minimum lock-in periods should be imposed, and no retrospective charges can be levied. For loans with dual (fixed and floating) rates, the waiver applies only when the loan is operating under a floating rate at the time of prepayment or foreclosure.

The RBI’s action follows observations of “divergent practices” and resulting customer grievances in MSME lending. Industry experts largely welcome the proposal. Vivek Iyer of Grant Thornton Bharat believes it will encourage more MSMEs to access formal credit, providing regulatory clarity and better cash flow management. M. Karthikeyan of CODISSIA noted that 3-5% of their members currently seek loan foreclosures due to difficulties obtaining additional loans from their existing lenders. Mithun Ramdass of SIEMA highlighted the current “nightmare” of foreclosure charges and processing delays, suggesting the RBI implement time limits for loan processing and transfers.

While the RBI aims to alleviate debt stress for MSMEs, IIFL Capital’s report suggests the proposal could reduce the profitability of retail lending products for some NBFCs due to increased competition. However, others, like Adhil Shetty of BankBazaar.com, believe the consumer benefits will ultimately benefit the industry as a whole. The issue of collateral requirements for micro-units also remains a concern, with J. James of TNACTE highlighting the difficulty many face in securing loans due to a lack of property ownership.

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