With the latest circular from the Reserve Bank of India (RBI) stating that the non-banking finance companies (NBFC) must allow their customers to prepay their floating loans without having to pay a (prepayment) penalty, as the custom followed up till now, “Ache din” seems to have arrived for borrowers.
The July 14 announcement by the regulator means a lot for the borrowers of floating rate loans from an NBFC in the country. Up till now, they have been religiously paying penalty, but not anymore.
With this, such customers are protected too, and a uniform loan prepayment practice has been established throughout the banking sector.
What do Floating rate loans mean?
In the case of floating rate loans, the interest rate is linked to the base rate of a bank, with a spread of up to 75 basis points (bps) usually. But, in case of NBFC, the interest rate on floating rate loans is linked to the retail prime lending rate (RPLR).
Such loans are generally offered by the NBFCs at 300-400 bps below RPLR. Short term loans, with a tenor ranging between one to five years, are disbursed by the NBFCs on a fixed rate basis. But, the long term loans in form of home loans and property are offered at floating rates.
In the year 2011, National Housing Bank, the regulator of mortgage lenders, ended prepayment penalty on floating rate home loans for NBFCs and therefore, prepayment penalty ceased to exist. But, loan against property on a floating rate still carried penalty that ranges between 1 per cent to 3 per cent of the total amount disbursed.
With the latest announcement by the central bank, everyone who has loaned against property on a floating rate basis will be benefitted.
But, all kinds of fixed rate loans will still attract penalty that ranges between 2% and 5% of the outstanding loan amount.
Note: A basis point is hundredth of a percentage point