MUMBAI: PNB Housing Finance and Aditya Birla Capital are expected to be among the worst hit by RBI’s proposal to remove foreclosure charges on loans to small businesses. Among banks, Axis, IndusInd & Kotak Mahindra may see a higher impact as fees account for a higher part of their total income compared to peers.
Last week, RBI announced plans to waive prepayment charges on floating rate loans up to Rs 7.5 crore per borrower. The new norms will apply regardless of the source of funds used for foreclosure or prepayment, whether partial or full.
According to an IIFL report, the proposed move aligns with existing rules for home loans and is expected to reduce profitability for retail loan against property (LAP), SME, and business loans due to increased competition. These segments account for 5-25% of the assets under management for non-banking financial companies and housing finance companies.
The change could intensify competition, particularly in the fixed-rate non-housing loan segment of affordable housing finance companies, as larger NBFCs may compete on rates. The proposal removes prepayment charges without a minimum lock-in period for floating rate loans to individuals and MSMEs up to Rs 7.5 crore, including balance transfers. It also applies to dual-rate loans (fixed + floating) if the loan is floating at the time of foreclosure or prepayment.
The removal of exit barriers is expected to drive higher competition, reducing profitability in the affected segments. Better-rated NBFCs with lower costs of funds might mitigate the impact by attracting higher-yielding customers through balance transfers from smaller peers.
PNB Housing Finance and Aditya Birla Capital are likely to be the most impacted, with 27% and 26% of their AUM in floating-rate MSME and LAP loans, respectively. A Macquarie report by Suresh Ganapathy highlighted similar concerns, noting that the draft circular proposes removing foreclosure charges and prepayment penalties on MSME loans under Rs 7.5 crore and individual loans.