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Access to credit is a common MSME challenge and the government has introduced several relevant initiatives and loan schemes to assist MSMEs in getting quick access to finance. It has also provided specific instructions to banks/NBFCs and other lenders on MSME business loan amount, tenure, foreclosure charges and more, to make it convenient and easy for MSMEs to get credit in time. Here, we’ll take a look at RBI notification on foreclosure charges for MSMEs – we’ll understand what are loan foreclosure charges, what is the percentage of foreclosure charges, and RBI’s policy and waiver of foreclosure charges for MSMEs. Let’s get started.

RBI notification on foreclosure charges for MSMEs

On 7 May 2014, the Reserve Bank of India (RBI) sent a notification on the ‘Levy of foreclosure charges/pre-payment penalty on Floating Rate Term Loans’ (RBI/2013-14/582 | DBOD. Dir.BC.No. 110/13.03.00/2013-14).

This circular was for all Scheduled Commercial Banks (excluding RRBs). The key highlights of this circular were:

  • In the interest of the consumers, banks should allow borrowers to pre-pay floating rate term loans without charging any penalty
  • Concerned banks will not charge any foreclosure charges or pre-payment penalties on all floating rate term loans offered to individual borrowers

The key point to keep in mind as per the circular is the waiver of foreclosure charges for MSMEs when offered on floating rates on term loans to individual borrowers.

Read here: RBI guidelines on foreclosure charges in May 2014

RBI notification on foreclosure charges for MSME

RBI guidelines on foreclosure charges – Update 26 May 2014

The circular was extended to all Primary (Urban) Co-operative Banks (UCBs) as well on 26 May 2014, that advised all UCBS to not levy foreclosure charges on floating rate term loans on loan sanctioned to individual borrowers. (Notification- RBI/2013-14/603 | UBD. CO. BPD. PCB. Cir. No. 64/12.05.001/2013-2014)

Read here: RBI circular on foreclosure charges – updated May 2014

RBI guidelines on foreclosure charges – Update 2 August 2019

On 2 August 2019, the RBI sent another notification on similar lines to all Scheduled Commercial Banks (excluding RRBs), all Small Finance Banks and all Local Area Banks.

In addition to the previous notifications on foreclosure charges, it was added that banks shall not charge any pre-payment penalties or foreclosure charges for any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).

Read here: RBI notification on waiver of foreclosure charges – updated August 2019

What is the RBI policy on foreclosure charges?

When it comes to RBI guidelines on foreclosure charges, RBI has advised all UCBs to not levy any foreclosure charges or pre-payment penalties sanctioned to individual borrowers on floating rate term loans.

Business Loan

The guidelines on foreclosure charges are specific to individual borrowers who have availed term loans on floating interest rates.

Can banks charge foreclosure charges to MSMEs?

From the RBI circular for foreclosure charges for MSMEs, the obvious question that arises is – can banks charge foreclosure charges?

  • As per the RBI guidelines, banks and NBFCs are not to charge foreclosure charges and pre-payment penalties on loans obtained by individual borrowers on a floating rate of interest.
  • Similarly, the Bank Code for MSEs (micro and small enterprises) does not allow banks to impose foreclosure charges on customers falling under the category of MSMEs.

As per a media report (Source: KNN Bureau, 7 March 2023), during the 27th Standing Advisory Committee of RBI, held in December 2022 in the city of Kolkata, the RBI had informed all banks that the Bank Code for MSEs was valid. Its violation by any ay could call for a complaint with the Banking Ombudsman.

Several MSMEs reported cases to the Federation of Indian Micro and Small & Medium Enterprises (FISME), especially after the pandemic, where several banks in the private sector, imposed pre-payment/foreclosure charges, if the borrower wished to change the bank from where it had borrowed the loan.

Post this, several private sector banks, namely ICICI Bank, followed RBI circular on waiver of foreclosure charges for MSMEs, and dropped pre-payment charges altogether.

Foreclosure charges for MSMEs:

For MSE borrowers to waive foreclosure charges, it is essential that they register their business as a MSME on the Udyam portal and download MSME certificate with its unique 19-digit URN number and QR code.

Zero foreclosure charges for MSMEs with RBI circular – Updates from banks

State Bank of India:

In accordance with RBI’s circular on foreclosure charges for MSMEs and the bank code for MSME foreclosure charges, the State Bank of India – the country’s largest public sector bank will not levy any foreclosure charges from micro and small enterprises businesses.

SBI clarified in its response to FISME that it is compliant with the RBIs guidelines and has all its processes in place. This is irrespective of limit or outstanding, and even in cases of takeover to other banks. (Source: KNN Bureau, 7 March 2023).

Also read: SBI e-Mudra loans


ICICI Bank has also waived off pre-payment penalties and foreclosure charges, following the RBI’s guidelines and the bank code for MSE foreclosure charges.

Also read: Business loan repayment – SBI, ICICI and other banks in India

Other banks:

IDFC First Bank Ltd. and Karur Vysya Bank Ltd. have also decided to drop foreclosure charges on MSE loan customers as per the RBI notification.

This is in accordance with the Code of Bank’s Commitment for Micro and Small Enterprises (MSEs), adopted in 2012 by all banks. The agreement was that they would allow pre-payment of fixed rate loans up to ₹50 lakhs without any pre-payment penalties. This was also extended to floating rate loans. (Source: KNN Bureau, 26 June 2023)

What is the percentage of foreclosure charges?

As we discussed, RBI has notified banks not t levy foreclosure charges on floating rate term loans for individual borrowers.

However, though many banks are aligned with the RBI guidelines on foreclosure charges, there are some private sector banks/NBFC lenders that charge a foreclosure-charge of 2% – 5% on the outstanding loan amount.

Update: 8 February 2024

RBI has announced that lenders will now have to provide borrowers with a Key Fact Statement (KFS) containing all essential requirements of a loan agreement. This is specifically for scheduled commercial bank loans to individual borrowers, microfinance loans, and RE led digital lending for all MSME loans and retail loans.

The KFS would come with all necessary information such as – all inclusive interest cost, foreclosure fees, etc.

(Source: The Economic Times, 8 February 2024)

Can foreclosure fees be waived?

The RBI circular on foreclosure charges is specific. As such, it is recommended that you read your business loan agreement thoroughly and negotiate your interest rate and foreclosure charges with the bank before taking up the loan.

Depending on the type of loan you are availing, your creditworthiness and previous banking history, and the policy the bank has adopted regarding waiver of foreclosure charges, you may get a discount on foreclosure charges or have it waived off.

What to do if bank imposes foreclosure charges?

Before you approach a bank for a loan for your MSE, ensure you have completed the MSME registration process on Udyam and have your certificate with you.

If the lender is levying a foreclosure charge, remind them of the RBI guidelines and negotiate on waiver of foreclosure charges on your business loan.

However, if the lender insists on charging and refuses waiver of foreclosure charges for an MSME, you can approach the Banking Ombudsman.

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to address customer complaints and grievances.

How to raise a compliant with Banking Ombudsman on foreclosure charges?

Here’s how you can raise a compliant with the Banking Ombudsman on foreclosure charges levied on MSMEs:

  • Visit the RBI’s website to lodge a complaint (visit the RBI’s website for complaints)
  • Click on ‘File a Complaint’
  • Fill in the form on the screen and details such as name, mobile number, etc.
  • Upload proof of bank refusing to reverse foreclosure charges

How to avoid foreclosure charges?

Here are some tips for you to avoid disputes with regard to foreclosure charges with your bank or NBFC while obtaining a business loan. This is especially true for MSMEs and small businesses, where sometimes the pre-payment penalties or foreclosure charges while transferring loans to another bank/lender is more than the interest payable. As such, follow the steps mentioned to ensure that you can negotiate and even avoid foreclosure charges:

  • Read the business loan agreement carefully to learn about the foreclosure charges.
  • Negotiate the terms and conditions for the business loan by reminding the bank of the RBI’s guidelines on foreclosure charges for MSMEs. You can also cite the reference of other lenders who have waived foreclosure charges as per RBI’s notification.
  • Submit your Udyam or MSME registration certificate and any other document that the lender requests to get a waiver of foreclosure charges.
  • Ensure to ask questions about the bank’s current practices to the loan officer if you find no mention of foreclosure charges in your loan agreement. This will help you to avoid surprises at a later stage.
  • Stay updated with the RBI guidelines and government regulations with regard to foreclosure charges. You can also take help of an expert for understanding regulations.

Frequently asked questions

What are the current pre-payment penalties on MSME loans?

While some banks do not impose any foreclosure charges on MSMEs, a few banks continue to do so. In most cases, foreclosure charges are between 2%-5% of the pre-payment amount excluding taxes. You can enquire in your bank about the foreclosure charges before closing or transferring the loan.

Is it mandatory to pay foreclosing charges?

It depends on the type of loan. As per the Bank Code for MSMEs, banks can not charge any foreclosure charges on MSME customers.

Can you avoid foreclosing charges?

Yes. You need to be careful while signing a business loan agreement with the bank. Read all clauses carefully. Check if the clause of foreclosure charges. If the clause mentions such a clause, you will need to negotiate with the bank.

Sohini Banerjee

Sohini is a seasoned content writer with 12 years’ experience in developing marketing and business content across multiple formats. At Tata nexarc, she leverages her skills in crafting curated content on the Indian MSME sector, steel procurement, and logistics. In her personal time, she enjoys reading fiction and being up-to-date on trends in digital marketing and the Indian business ecosystem.