If enforced, this regulation is likely to have a material impact on the income streams of non-banking financial companies (NBFCs) and banks, particularly in terms of their fee-based income derived from foreclosure penalties, global financial services firm Morgan Stanley said in its report.
Moreover, it may increase loan churn as borrowers could be incentivised to switch lenders more frequently in search of better rates, it added. Loan churn refers to when a customer closes a loan before the scheduled tenure or shifts to a new lender.The move is expected to particularly affect NBFCs with a significant proportion of floating-rate loans against property (LAP) in their portfolios. Among the key players with high exposure to these loans are Aditya Birla Capital (ABCL), PNB Housing Finance (PNBHF), Cholamandalam Investment and Finance (Chola), Aavas Financiers, and Home First Finance, Morgan Stanley mentioned.
While the removal of foreclosure charges could hurt profitability, industry experts believe NBFCs and banks may counterbalance the impact by slightly increasing processing fees and adjusting loan spreads across their portfolios.For major banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and IndusInd Bank, the impact may be limited. These institutions already refrain from charging prepayment penalties for MSE borrowers. However, individual business owners and sole proprietors often face foreclosure fees ranging between 2% and 5%, which are usually negotiable, Citigroup said.
Bajaj Finance, a key NBFC player, imposes prepayment penalties on term loans but waives them for its Flexi loan variants.
Meanwhile, Chola does not levy foreclosure charges on floating-rate LAP and secured business loans. On the other hand, Shriram Finance and affordable housing finance companies (AHFCs) like Aptus and Aavas primarily deal in fixed-rate LAP and business loans, making them less affected by this proposed rule, the broking firm said.
Eliminating foreclosure fees could drive higher balance transfer (BT) transactions, intensifying competition in the lending space. Borrowers may be more inclined to refinance their loans with institutions offering more attractive interest rates, further pressuring lenders to fine-tune their pricing strategies, it added.
As the March 21 deadline for feedback approaches, stakeholders will be closely evaluating the broader implications of this proposal. While borrower-friendly, the regulation poses a challenge for lenders who must adapt to a shifting revenue model while maintaining profitability in an increasingly competitive market.
