RBI Draft Bans Prepayment Penalty on Floating-Rate Loans
Why in the news
RBI proposed scrapping prepayment penalties on retail and small business loans, a step expected to dent lenders’ fee income and profits.
Key facts
- Applies to floating-rate loans to individuals (non-business use) and MSME loans up to ₹7.5 crore.
- Home loans are already exempt, so HFC and bank mortgage books are unaffected.
- Major banks do not levy such charges on floating loans, so NBFCs face the larger impact.
- Stiffer competition may push borrowers to switch lenders.
- Feedback from lenders expected by March 21.
Likely lender response
- Chase higher-yielding customers and loans.
- Raise interest rates or processing fees.
- Improve operating efficiency to protect margins.
Exposure of lenders (% of book)
| Lender | SME | LAP | Business loans |
|---|---|---|---|
| Aditya Birla Finance | 29% | 26% | – |
| HDFC Bank | 19% | – | 14% |
| ICICI Bank | – | – | 19% |
| SBI | 12% | – | – |
| Bajaj Finance | 12% | 3% | – |
| Axis Bank | 11% | 7% | 6% |
| Bank of Baroda | 11% | 2% | – |
| Cholamandalam | 4% | 22% | – |
| LIC Housing Finance | – | 12% | – |
| M&M Financial Services | 5% | – | – |
Exam angle
- MSME loan limit: ₹7.5 crore; segments hit: LAP, SME and business loans.
- Terms: prepayment penalty, foreclosure charge, floating rate.