Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 – Summary
The Reserve Bank of India (RBI) introduced the “Pre-payment Charges on Loans” Directions, 2025 to ensure uniformity in the treatment of pre-payment charges by Regulated Entities (REs), particularly for loans given to Micro and Small Enterprises (MSEs). RBI found that many REs followed inconsistent practices regarding pre-payment charges, and some included restrictive clauses in loan agreements that discouraged borrowers from switching lenders for better terms or lower interest rates. This created borrower dissatisfaction and hindered access to affordable finance.
These Directions, issued under various provisions of the Banking Regulation Act, RBI Act, and the National Housing Bank Act, will apply to all loans and advances sanctioned or renewed on or after January 1, 2026. They are applicable to all commercial banks (excluding payments banks), co-operative banks, NBFCs, and All India Financial Institutions.
Key Provisions:
- No Pre-payment Charges:
- On floating rate loans to individuals (non-business purposes), no RE shall levy pre-payment charges.
- For business loans to individuals and MSEs:
- Commercial banks (except SFBs, RRBs, and LABs), Tier 4 urban co-operative banks, NBFC-ULs, and AIFIs must not levy pre-payment charges.
- SFBs, RRBs, Tier 3 urban co-operative banks, State and Central co-operative banks, and NBFC-MLs must not charge pre-payment fees if the sanctioned amount is up to ₹50 lakh.
- These rules apply regardless of the source of pre-payment or any lock-in period.
- Special Cases:
- For dual/special rate loans, the rule applies only if the loan is on floating rate at the time of pre-payment.
- In all other cases, pre-payment charges (if any) must be per the RE’s policy and based on the amount prepaid.
- For cash credit/overdraft, pre-payment charges apply only if closed before the due date, and only on the sanctioned amount.
- Transparency and Fair Practices:
- No charges if pre-payment is initiated by the RE.
- All terms on pre-payment charges must be disclosed in sanction letters, loan agreements, and Key Facts Statements.
- Charges once waived cannot be applied retrospectively.
Finally, older circulars mentioned in the Annex stand repealed from January 1, 2026, and are deemed valid only until then.
