Foreclosure Charges
As per the RBI circular dated August 02, 2019, RBI has prohibited banks from charging foreclosure charges or pre-payment penalties on floating rate term loans sanctioned to individual borrowers for purposes other than business.
In the case of Manoharan vs RBI and Ors, the Writ petition was filed in 2017, claiming that the proprietor entered the loan agreement. Therefore, he should be treated as an Individual borrower and hence exempted from foreclosure charges. However, the madras high court stated that in the present case, in the loan document, the petitioner has affixed the seal of “M/s.Murugan Idli Shop” and signed it as its Proprietor. The loan was sanctioned in the name of the proprietary concern. As the legal entity, the petitioner would not fall under the “individual borrower” category as per the Reserve Bank of India Circular of the year 2014. The court held that it is the authority of the RBI to expand the “Individual borrower” and not the court.
In the case of M. Yogam Naidu v. The Bank of Baroda and ors, the Telangana High Court has allowed the individual borrower to be entitled to the repayment of the prepayment charges as per the guidelines of the RBI. The High Court allowed the writ petition and, therefore, issued a writ of mandamus to repay the prepayment charges to the customer.
Para 5.3 of the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME)
Sector]-Directions, 2017 ["directions of 2017"]. It is true that in terms of Para 5.3, the BCSBI, in
collaboration with the Indian Banks Association (IBA), the RBI and member Banks, have evolved the
„Code of Bank’s Commitment to Micro and Small Enterprises [ "the Code"]. The objective of the
Code is to promote good banking practices, set minimum standards for the adherents, increase
transparency and achieve higher operating standards, etc. The Code of Banks’ commitment to Micro
and Small Enterprises issued in August 2015 contains the commitment of the Bank to the Micro,
Small and Medium Enterprises borrowers that it will not charge or levy any pre-payment penalty on
floating interest rate loans extended to such entities. Clause (h) of para 5.3 of the Code provides as
follows:- "5.3. Sanction / Rejection We will: a……………………………………………………………
…………………………………………………………….. …………………………………………………………….. h. Permit
prepayment of floating rate loans without levying any prepayment penalty,"
In the case, Cottage Industries Exposition Ltd Vs Union of India, the Jammu and Kashmir High Court has stated that since the loan borrower was not a registered MSME at the time of the loan and was a company registered under the Companies Act is not entitled to repayment of prepayment charge as per the RBI guidelines.
good blog