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FISME advises MSMEs to challenge foreclosure penalty before Banking Ombudsman

Updated: Jan 24, 2023 11:17:04am

FISME advises MSMEs to challenge foreclosure penalty before Banking Ombudsman

New Delhi, Jan 24 (KNN) Upping the ante against the Banks’ practice of imposing foreclosure or prepayment penalties, the Federation of Indian Micro and Small & Medium Enterprises (FISME), has advised MSEs to challenge the penalty before the institution of Banking Ombudsman.


According to the Code of Bank’s Commitment for Micro and Small Enterprises’ which was adopted by all commercial banks in 2012, Banks had committed that they would ‘permit prepayment of fixed rate loans up to Rs. 50 lakh without levying any pre-payment penalty and also ‘permit prepayment of floating rate loans without levying any prepayment penalty’.

“Banks, primarily private sector Banks continue to flout their own commitment given in Code and slap foreclosure penalties on hapless micro and small enterprises ranging from 2-4 per cent on sanctioned loan”, says Neeraj Kedia, Chairman of Banking & Finance Committee of FISME. 

These penalties are evoked if a small enterprise decides to move on to another bank for better financial terms. Banks also withhold papers of securities of such customers. 

“It is disappointing that these Banks have tried to discredit the Code itself, stating that the Board which led to the formulation of the Code was under dissolution and hence the Code was infructuous. However, continued lobbying by FISME has finally led RBI to clear the air by amending the Master Circular which now upholds the Code”, adds Kedia. 

The Para 5.3 of amended RBI Master Circular RBI/ FIDD/ 2017-18/56 29th July 2022 states that ‘while BCSBI has initiated the process of its dissolution, banks may continue to follow their commitments as hitherto under the Code of Bank’s Commitment for Micro and Small Enterprises’.    

Following RBI’s 27th Meeting of the Standing Advisory Committee to review the flow of credit to MSMEs, held in Kolkata on 15th Dec 2022, in which FISME had sought clarity on sanctity of the Code and powers of Banking Ombudsman, the central bank has noted in the Minutes of the Meeting that Banks have been advised to continue to follow their commitment to Micro and Small Enterprises. Failure to adhere to the Code can be a ground for approaching Banking Ombudsman’. 

FISME has issued a circular to members advising affected MSMEs to file the cases before Ombudsman. (KNN Bureau)


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