Banks can’t levy foreclosure charges on biz loans: HC
Kolkata: The Calcutta High Court has held that banks cannot levy foreclosure or prepayment charges on floating rate term loans even when such loans are taken for business purposes, directing a bank to refund over Rs 25 lakh recovered from an MSME borrower.
The ruling by the bench of Justice Krishna Rao came on a writ petition filed by a proprietorship firm registered as a Micro, Small and Medium Enterprise, which had availed a term loan and an overdraft credit facility from the respondent bank in August 2024.
While the sanctioned overdraft limit was Rs 5 crore, only Rs 4 crore was released. In January 2025, the firm sought foreclosure of both the term loan and the overdraft facilities.
The bank demanded Rs 7,82,282.02 as foreclosure charges for the term loan and Rs 17.70 lakh as foreclosure charges for the overdraft facility, calculated at three per cent of the original sanctioned amount. The firm paid the amounts under protest and challenged the levy before the High Court. Justice Krishna Rao examined the Reserve Bank of India circular dated May 7, 2014, which bars banks from charging foreclosure or prepayment penalties on floating rate term loans sanctioned to individual borrowers.
The court noted that the circular does not distinguish between loans taken for personal use and those availed for business or commercial activities.
The bank argued that the petitioner, being classified as a medium enterprise, was not entitled to the benefit of the circular, and relied on the RBI (Pre-payment Charges on Loans) Directions, 2025. The court rejected this contention, observing that the 2025 Directions apply only to loans sanctioned or renewed on or after January 1, 2026, whereas the loans in question were sanctioned in August 2024.
The court also took note of an earlier decision of the High Court holding that the 2014 RBI circular applies uniformly to individual borrowers and cannot be restricted based on the purpose of the loan.
Holding that the foreclosure charges were illegally recovered, the High Court directed the bank to refund Rs 7,82,282.02 and Rs 17.70 lakh to the petitioner within two weeks.
