What is Commitment Charge?

A fee charged by a lender to a borrower for the unused/underutilized working capital limit and or undisbursed loan amount is known as commitment charge. A commitment fee is generally specified in the sanction endorsement of loans as a fixed percentage of fee payable by the borrower on the the undisbursed or  unutilzed loan amount. Such charges are levied by the lenders because once the credit limit is sanctioned to a borrower, the lender has to set aside the sanctioned loan amount from his(lender’s) source of funds to keep the line of credit open or to guarantee a loan at a specific date in future irrespective of future conditions in the financial or credit markets. If the borrower does not fully utilise the limit sanctioned, the lender cannot yet charge interest to the borrower on undisbursed portion of loan or unutilised/underutilized working capital limit. Therefore, commitment charge is collected by the lender only  on unutilized/underutilized funds. In the other words, commitment fee is levied on the undisbursed loan amount, whereas interest is charged on the disbursed amount of the loan.

As per RBI guidelines, banks are free to evolve their own guidelines in regard to commitment charge for ensuring credit discipline. However, Banks are under obligation to follow Fair Practices Code and keep all information on all charges upfront to customer on their website, including information about “commitment charges”.

For example, BOB in its official website clarified that  the ‘Commitment charges’ will be levied by it in case of non-utilization / underutilization of working capital limits for advance account with fund based working capital limits of Rs.100 lakh (One Crore) and above. The bank has also provided information on the basis of which it is levying commitment charge viz. Where average utilization is 60% and above of the limit or as indicated in QIS statement, no commitment charges to be recovered separately .However, when the average utilization is below 60% of the limit or as indicated in QIS statement, commitment charges to be recovered @ 0.50% p.a. for the unutilized portion, as per existing guidelines.