Medium Enterprises Also Protected Against Foreclosure Charges: Calcutta High Court Orders Refund for MSME Borrower Penalized for Prepaying Loan

“RBI’s 2014 Circular Does Not Discriminate Between Personal or Business Loans—Medium Enterprises Covered”, In a significant ruling expanding the scope of borrower protections under RBI guidelines, the Calcutta High Court held that banks cannot levy foreclosure charges on floating rate loans given to MSMEs, including medium enterprises, when such charges are prohibited by RBI’s binding circulars.

Justice Krishna Rao, sitting in the Writ Appellate Jurisdiction, allowed the writ petition filed by Khatu Shyam Trading Co., a registered MSME, and directed the respondent bank to refund a total of ₹25,52,282.02 levied illegally as foreclosure charges on a Term Loan and Overdraft Facility that the petitioner had prepaid.

“The Reserve Bank of India, in its circular dated 7th May, 2014, does not draw any distinction between individual borrowers based on business or personal use, nor does it exclude medium enterprises,” observed the Court, rejecting the bank’s argument that only micro and small enterprises were entitled to such relief.

“Contractual Clauses Cannot Override RBI Circulars—Binding Regulatory Directions Must Prevail”

Bank’s action in demanding prepayment penalties declared “illegal and arbitrary”

The petitioner had availed a Term Loan of ₹2.38 crore and an Overdraft Facility of ₹5 crore from the respondent bank in August 2024. Upon deciding to foreclose both accounts in January 2025, the bank demanded ₹7,82,282.02 for the Term Loan and ₹17,70,000 for the Overdraft—charges that the petitioner challenged under Article 226 of the Constitution.

The respondent bank sought to justify its action by citing:

1. A contractual clause in the loan agreement authorising foreclosure charges;
2. The RBI Pre-payment Charges on Loans Directions, 2025, which supersede earlier circulars.

However, the High Court categorically held that contractual terms must yield to statutory circulars issued by the RBI, especially when such circulars are meant to protect borrowers.

“Even though the loan agreement permits prepayment penalties, such a clause cannot override a binding regulatory direction issued by the Reserve Bank of India in exercise of its statutory powers,” the Court ruled.

“RBI’s 2025 Directions Have Only Prospective Effect—Earlier Circular Continues to Govern Past Loans”

“Loans disbursed before 01.01.2026 remain governed by 2014 Circular”

The bank also argued that the 2014 circular had been superseded by the RBI Directions of 2025, and therefore the petitioner could no longer rely upon it. However, the Court rejected this contention after examining Clause 3(ii) of the 2025 Directions.

“As per Clause 3(ii), the new Directions apply only to loans sanctioned or renewed on or after 1st January 2026. In the present case, the loans were sanctioned on 30th August 2024—hence, the 2025 Directions have no applicability,” held Justice Krishna Rao.

The Court confirmed that the RBI Circular dated 7th May 2014, which prohibited banks from levying foreclosure charges on floating rate term loans to individual borrowers, was fully applicable to the petitioner.

“Medium Enterprises Are Also ‘Individual Borrowers’ Under the 2014 Circular—No Justification for Discrimination”

Bank’s reliance on MSME size rejected—Borrower status determined by RBI circular, not enterprise scale

A key issue in the case was whether the petitioner, being classified as a “Medium Enterprise” under the MSME Act, could claim protection under the RBI’s 2014 Circular, which refers to “individual borrowers”.

The bank argued that the circular applies only to micro and small enterprises, not medium ones. But the Court rejected this restrictive reading.

“There is no distinction in the 2014 Circular based on the size of the enterprise. The term ‘individual borrowers’ is not limited to consumers or individuals in personal capacity, but also includes proprietorship MSMEs availing loans for business purposes,” said the Court.

The judgment also drew strength from the earlier decision in Devendra Surana v. Bank of Baroda, where the Calcutta High Court held that even medium enterprises are covered under the term “individual borrowers” for the purpose of the 2014 circular.

Bank Directed to Refund ₹25.52 Lakhs Within Two Weeks

Upon holding the foreclosure charges illegal, the High Court directed the respondent bank to refund ₹7,82,282.02 for the Term Loan and ₹17,70,000 for the Overdraft Facility within two weeks from the date of the order.

“The bank’s action in collecting foreclosure charges from a registered MSME is arbitrary and unsustainable in law,” Justice Rao concluded.

The writ petition was accordingly allowed, with directions to refund the amount within the stipulated period.

Date of Decision: 7 January 2026