Foreclosure charges on sole proprietorship loans are barred where the borrower is effectively an individual under the RBI circular.

A Reserve Bank of India circular barred banks from levying foreclosure charges or prepayment penalties on floating rate term loans sanctioned to individual borrowers, and the text treats a loan taken in the name of a sole proprietorship as falling within that category because the proprietorship has no separate legal existence from its owner. It further states that no distinction should be drawn between loans taken for personal use and loans taken for business purposes when the borrower is, in substance, an individual. On that reasoning, foreclosure charges and prepayment penalties had no basis under the circular.

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Issues: Whether the Reserve Bank of India circular prohibiting foreclosure charges or prepayment penalties on floating rate term loans sanctioned to individual borrowers applied to a loan taken in the name of a sole proprietorship firm.

Analysis: The petitioner was a natural person carrying on business as a sole proprietorship. A sole proprietorship has no separate legal existence from the person who owns it, and the loan was therefore, in substance, sanctioned to an individual borrower. The circular of 7 May 2014 barred banks from levying foreclosure charges or prepayment penalties on floating rate term loans sanctioned to individual borrowers, and no distinction could be read into that circular between loans taken for personal use and loans taken for business purposes. The subsequent foreclosure was thus governed by the circular and the bank's demand for such charges had no basis.

Conclusion: The circular applied to the petitioner, and the bank was not entitled to levy foreclosure charges or prepayment penalties.

Final Conclusion: The writ petition succeeded, and the bank was directed to refund the deposited amount with interest.

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