As an SME founder or finance head, you’re no stranger to the importance of capital. And when that capital comes from a bank loan, the number you focus on first is the interest rate. But here’s the uncomfortable truth: the real cost of your loan is buried elsewhere—in the fine print of the bank sanction letter.
Banks often load sanction letters with layers of charges that are difficult to understand, poorly explained, or intentionally vague. And if you’re not reading closely, these “extras” could erode your margins faster than you think.
In this edition, we decode different types of bank charges, explain where to find them, and show how they quietly damage your profitability.
Let’s begin.
Why Bank Charges Deserve Your Attention
While interest is the most visible part of your loan cost, non-interest charges often contribute 15–30% of the total cost over the life of a facility. These include administrative fees, inspection costs, renewal charges, and more. The worst part? Many SMEs don’t even know they’re being charged until the debit hits their account, sometime even then it escapes them.
Understanding these charges is not just good housekeeping—it’s a financial strategy.
Decoding Bank Charges That Hit Your Bottom Line
Where Are These Charges Listed?
They are usually found in:
- The Sanction Letter
- The Terms Sheet
- Annexures (e.g., Schedule of Charges)
- Or, buried in your Loan Account Statements over time
These documents form the legal contract between your business and the bank. Every clause has the power to affect your loan servicing cost and even your banking relationship.
An SME never reads the Sanction Letter properly. To get a proper review of your Sanction Letter, take a Demo of BankKeeping.
Common Types of Bank Charges and Hidden Costs You Might Be Overlooking
Processing Fee
Charged upfront for evaluating your application and charged on the entire quantum of the Loan.
- Typical Range: 0.25%–1% of the loan amount
- Impact: Immediate deduction from the disbursed loan, reducing usable funds.
Tip: Always ask for a breakdown and negotiate this, especially if you are a repeat borrower.
Annual Renewal Fee
Banks have started charging this also on term loans. So even though earlier the Term Loans had no such renewal charges, Banks have now started charging this annually on the term loan too.
- Typical Range: 0.20% to 1.00%
- Frequency: Annually
- Impact: Hits your P&L every year, even if your loan utilization is low.
Tip: Clarify if it’s fixed or linked to the limit sanctioned, remember for Term Loans it should be on the reduced Balance and not original sanction amount.
Documentation Charges
Charged for preparing loan agreements, legal verification, valuation reports, etc.
- Typical Range: ₹5,000–₹25,000
- Impact: Adds hidden cost before disbursement.
Tip: Many banks allow you to choose your own lawyer/valuer—compare costs.
Inspection Charges
Banks conduct periodic site visits to check your business premises and stocks.
- Typical Range: ₹5,000 –₹20,000 per inspection
- Impact: Quarterly or monthly debits that add up fast.
Tip: Track these in your loan statement and reconcile the visit records.
Commitment Charges
Charged on the unutilized portion of your sanctioned loan.
- Typical Rate: 0.25%–1% annually on unused amount
- Impact: You pay even for limits you don’t use.
Tip: If your working capital needs fluctuate, negotiate to waive this.
Penal Interest
A higher rate charged if you breach any loan terms or delay payments.
- Typical Rate: 2%–6% above normal interest
- Impact: Immediate profitability impact if you miss a financial covenant.
Tip: Monitor key covenants like DSCR, stock statements, and financial submissions on time.
Foreclosure Charges
Charged when you repay your loan before the end of tenure.
- Typical Range: 2%–4% of outstanding principal
- Impact: Kills savings from early repayment.
Tip: Always clarify foreclosure policy—especially for long-term loans or high-interest products. Try to get this waived off. Remember RBI has policies to protect SMEs from these costs.
Prepayment Penalties
Similar to foreclosure but can apply even for partial repayments.
- Impact: Limits your flexibility to bring down interest costs when cash is available.
Tip: Push for zero prepayment penalty for working capital loans or loans with floating interest. You can even ask for gradual removal.
Insurance Charges
Some banks bundle insurance for the loan, borrower life, or property.
- Impact: Often force-sold at high premiums and deducted from disbursement.
Tip: Ask if insurance is mandatory. If not, opt out or buy your own cheaper plan.
Legal and Valuation Fees
Charged for legal due diligence and third-party valuation of assets.
- Impact: Can be unexpectedly high, especially if repeated during renewals.
Tip: Ask if the valuation is needed annually or just at the start. Push for Bi-annual evaluation.
Account Maintenance Charges
Monthly or quarterly charges for operating the loan account.
- Typical Range: ₹500–₹2,000 per quarter
- Impact: These are rarely noticed but recurring.
Tip: These should ideally be waived for customers with good repayment history.
How Do These Charges Hurt Your Bottom Line?
Let’s say you raise a ₹1 crore term loan.
The interest rate is 10% p.a., but the true cost may look like this:
| Charge Type | Amount (₹) |
|---|---|
| Processing Fee (1%) | 1,00,000 |
| Legal + Valuation | 25,000 |
| Renewal Fee (3 years) | 90,000 |
| Inspection Charges | 30,000 |
| Foreclosure Penalty | 2,00,000 |
| Insurance Premium | 50,000 |
| Total Non-Interest | ₹4.95 Lakh |
Effective rate becomes ~14.95% instead of 10%.
That’s a serious hit to your EBITDA—and most SMEs never realise it until much later.
What Can SMEs Do to Detect and Avoid Hidden Charges in Business Loan?
- Read the Sanction Letter Thoroughly
Don’t rush. Have an expert review terms with you. - Ask for a “Schedule of Charges”
Most banks have this—make it part of your negotiation. - Track Charges Monthly
Monitor loan statements to detect surprise deductions. - Negotiate Terms Upfront
Don’t assume charges are non-negotiable. Push for waivers or reductions. - Get External Help
Use platforms like BankKeeping to monitor, audit, and negotiate your banking relationships.
For more on BankKeeping, take a demo today
Final Word: Cost Control = Capital Preservation
Every rupee you save in banking charges is a rupee you can reinvest in growth, people, or innovation.
In today’s tight-margin world, you can’t afford to treat loan charges as a black box. With better visibility, smarter review processes, and expert support, you can turn banking from a liability into a strategic partner.
Need Help Making Sense of Your Sanction Letter?
BankKeeping decodes charges, reviews your statements, and helps you negotiate better terms—so you never overpay again. Click here for a Demo