What is a Commitment Fee?

After a loan is approved, banks and financial institutions plan to ensure the availability of the funds expecting that the customer will utilize the approved loan as planned. If the customer does not utilize a certain portion of the approved loan within the specified period, the institution providing the loan charges a fee as per the agreement. This fee is known as a commitment fee.

What is the Regulatory Provision Related to This?

- If the customer utilizes less than 60 percent of their approved credit limit on an annual average, the fee can only be charged on the unused portion of the limit. For example, if only 35 percent is used on average, the commitment fee can only be charged on the unused 25 percent.

- The fee that institutions can charge is 20 percent of the service fee (0.75 percent for commercial banks, 1 percent for development banks, and 1.25 percent for finance companies).

This fee can be charged only once at most.

Important Points:

- The CD ratio and the interbank interest rate also play a significant role.

- This provision is made to ensure the availability of resources.