Pvt banks levying steep foreclosure fees: MSMEs

An association representing nearly two million small enterprises in India has accused top private banks of levying steep charges to foreclose their loans, at a time many of these firms are facing severe input pressures due to rising commodity prices.

Hidden charges levied by banks are putting severe pressure on working capital, said Anil Bhardwaj, secretary-general, Federation of Indian Micro and Small and Medium Enterprises (FISME). Foreclosure charges are levied by lenders when customers seek to close loans before the end of the tenure.

The federation has raised the issue with the Union MSME ministry, Bhardwaj said.

“If an unsatisfied MSME customer wants to leave the bank, whether because of excessive interest rates or laxity in services, private sector banks levy heavy penalties in the form of foreclosure charges. In the last month alone, close to 50 cases have been reported to the FISME. In order to deter the exiting MSMEs, private sector banks have invented another penalty clause: non-compliance charges. Customers are never informed of the non-compliance during the time they availed of services of the bank but are devised only at the time of leaving. In one case, the loan was of ₹3 crore and the non-compliance bill was above ₹50 lakh”, Bhardwaj said in an interview.

According to FISME, it has received most complaints against Axis Bank and HDFC Bank; however, several other private sector banks such as IDFC First Bank, IndusInd Bank, IDBI Bank and Yes Bank also impose such charges to prevent MSME customers from leaving, Bhardwaj said.

“The bank does not follow any practice inconsistent with extant regulations. Its charges are disclosed and contracted with customers in line with internal and external guidelines. The facilities are booked post getting sanction letter and documentation duly accepted by the customer containing the terms and conditions including commercials,” an HDFC Bank spokesperson said in a statement. The bank further said it has supported the MSME sector as the banking industry’s largest provider of emergency credit line guarantee scheme (ECLGS) facilities, and has also increased its MSME exposure by over 40% in the last fiscal and expanded MSME credit extension in over 600 districts.

However, FISME claimed that the practice of imposing foreclosure charges is against the bank’s own code of conduct. The association further said both public and private sector banks are signatories to the ‘Code of Bank’s Commitment to Micro and Small Enterprises’, which they themselves prepared and adopted “under the aegis of the RBI”.

An official with a Rajasthan-based MSME, who did not want to be named, said most banks interpret rules in a way which flout the code.

“Some say pre-payment from own funds would not attract foreclosure charges, but the charges will be levied if the payment is made by another bank that the customer wants to switch to,” the MSME owner said.

Contradicting the same, IDBI Bank said any charges levied or stipulated are within the ambit of the code of conduct. The bank further said that the charges are explicitly stipulated in sanction letters, which are explained to borrowers before disbursement. Such sanction letters are invariably accepted by borrowers under their seal and signature and only then the bank levies foreclosure charges, an IDBI Bank spokesperson said.