RBI Draft Foreclosure Guidelines

The Reserve Bank of India (RBI) has introduced new draft guidelines aimed at enhancing borrower flexibility and increasing competition among lenders for products like home loans, loans against property, and business loans to small and medium enterprises (SMEs).

Impact on Lenders

• Increased Competition: The guidelines could heighten competition among lenders, especially in floating rate retail loans against property and SME loans.
• Profitability Concerns: Lenders' profitability may be affected as customers can switch to lower rates, similar to existing practices with home loans.

Details of the Guidelines

• Waiving Pre-payment Penalties: RBI proposes to remove pre-payment penalties and foreclosure charges for retail borrowers and small businesses.
• SME Borrower Threshold: The guidelines set a threshold for SME borrowers at ₹7.5 crore.
• No Minimum Lock-in Period: Lenders are required to permit loan foreclosure/pre-payment without any minimum lock-in period.
• Policy Compliance: If lenders impose charges, these must align with a board-approved policy.

Effect on Non-Banking Financial Companies (NBFCs)

• Asset Vulnerability: Floating rate loans constitute about 5% to 25% of assets under management (AUM) for non-bank lenders and housing finance companies and are seen as most vulnerable.
• Competitive Strategies: Better-rated NBFCs may counteract impacts by shifting focus to more granular, higher-yielding customers.
• Long-term Impact: Over time, competitive intensity may rise for fixed rate non-housing loan books among affordable housing finance companies.