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Foreclosure charges on the od limit by hdfc bank

(Querist) 31 March 2023 This query is : Resolved 
I have a OD limit with HDFC Bank for a very long time and HDFC bank has been charging high interest rates from me and now other private bank offers me lower rate of interest and I want to switch the bank.
If I switch my bank right now then do I have to pay the foreclosure charges? Today I received a letter from the bank citing the changes in the agreement regarding the prepayment charges. They tend to charge 4% if I am not registered under MSME at the relevant time of availing the facilities and 2% if I am registered and NIL if I want to reduce the business liabilities. My renewal date is due in June and I was registered under MSME and I have a MSME certificate dated 29.03.2022.
I want to ask:
1) The exact definition of prepayment charges and whether they apply at the time of renewal?
2) Whether I come under MSME or not as mentioned by the bank at the time of availing the services?
3) If I change my bank by the means of takeover at the time of renewal, then whether the prepayment charges apply or not?
4) If I Pay all the outstanding amount with my own funds at any given point of time, then whether the prepayment charges apply or not?
T. Kalaiselvan, Advocate (Expert) 01 April 2023
One avails loans to meet various needs in life, like home loans, vehicle loans, personal loans, education loans, business loans and so on. A major responsibility is then to repay these loans. One can go for the more common ‘repayment throughout the entire loan term’ or a few opt for ‘Prepayment or Foreclosure of their loans’. Whatever manner they choose to close their loans, one has to understand the terms of loan repayment to take advantage of the benefits offered by banks to borrowers.

Prepayment is a facility that allows you to repay your loan, either in part or in full, before the end of the loan term. It allows you to invest any surplus funds you come across into your loan account.
Foreclosure is a legal process where the borrower repays his debt in full before the term of the loan ends.
One has to check with the bank for prepayment penalties. Though RBI mandates no prepayment/foreclosure charges for floating interest rate loans, personal loans or others with fixed interest rates are exempted from this rule.
Banks charge anywhere between 4-5% of the outstanding loan amount as prepayment charges on personal loans. The idea of prepaying a loan is to reduce the interest burden. If the prepayment charges are high, it invalidates the prepayment benefits. So, calculate the prepayment charges as against the interest benefits you will be gaining before going in for the prepayment or foreclosure.
Calculate the impact of the prepayment or foreclosure on the rest of your finances.
Think twice before opting for balance transfer of loans. Many banks and NBFCs offer attractive offers to customers willing to transfer their existing loans to their institutions. However, the processing fees and other charges levied might be high and completely undermines the purpose of balance transfer. Calculate all the charges and compare them against the benefits of balance transfer before opting for one.
If you pay off your debt before the agreed-upon duration, your bank could suffer a loss because you've already paid off the loan. Your bank might impose a prepayment penalty as compensation for this loss. A bank often levies a 2-4 percent prepayment/foreclosure fee.

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