The Reserve Bank of India on Wednesday proposed banks and non-banking financial companies (NBFCs) not to levy foreclosure charges or pre-payment penalties on floating rate term loans sanctioned to micro and small enterprises.

The move is expected to bring relief to micro and small enterprises.

"With a view to safeguarding customers' interests through better transparency and customer centricity by lenders, it has been decided to broaden the scope ewof such regulations to cover loans to micro and small enterprises (MSEs) extended by the regulated entities of the Reserve Bank," the central bank said in a statement.

Earlier, banks and NBFCs were not permitted to charge pre-payment penalties on floating rate term loans sanctioned to individual borrowers for purposes other than business.

“It is now proposed to broaden the scope of these guidelines to include loans to MSEs,” RBI Governor Shaktikanta Das said while announcing the bi-monthly monetary policy on Wednesday.

A draft circular in this regard will be issued for public consultation. 

Earlier, the Federation of Indian Micro and Small and Medium Enterprises (FISME) alleged that some banks have been using foreclosure and non-compliance charges to punish the MSME borrowers that are looking for better terms and credit facilities with other rival entities.

"MSEs typically take unsecured business loans, which are normally on a fixed rate, as well as loan against property, which is on floating rate," said Anil Gupta, senior vice-president, co-group head, financial sector ratings, ICRA. 

"While positive for customers, the RBI's move will have a negative impact on the profitability of lenders, and could also potentially increase the loan prepayments and balance transfer,” he added.