The Reserve Bank of India (“RBI”), in exercise of the powers conferred under Section 21, Section 35A and Section 56 of the Banking Regulation Act, 1949, Section 45JA, Section 45L and Section 45M of the Reserve Bank of India Act, 1934 along with Section 30A of the National Housing Bank Act, 1987, vide Circular No. RBI/2025-26/64,[1] dated July 02, 2025, has issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 (“Pre-payment Directions”), with the objective of promoting fair lending practices and ensuring ease of credit access, particularly for individual borrowers and Micro and Small Enterprises (“MSEs”). The Pre-payment Directions shall be applicable to all loans and advances sanctioned or renewed on or after January 01, 2026.
These Pre-payment Directions address concerns around unfair pre-payment charges and restrictive clauses that hinder borrowers from switching to better lending options.
Key Highlights of the Pre-payment Directions
1. Scope and Applicability: The Pre-payment Directions covers commercial banks (excluding payment banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions.
2. No Pre-payment Charges: No pre-payment charges shall be levied for:
(a) Floating rate loans granted for non-business purposes to individuals.
(b) Floating rate loans granted for business purposes to individuals and MSEs, with specific coverage based on lender type:
- Completely exempt: Commercial banks (excluding Small Finance Banks, RRBs, and LABs), Tier 4 Urban Co-op Banks, NBFC-ULs, and AIFIs.
- Exempt for loans up to INR 50 lakh (Indian Rupees Fifty Lakhs Only): Small Finance Banks, RRBs, Tier 3 Urban Co-op Banks, State/ Central Co-op Banks, and NBFC-MLs.
(c) These exemptions are irrespective of the source of funds used for pre-payment and without any lock-in period.
3. Applicability for Dual/ Special Rate Loans: Applicability of the above shall be determined by whether the loan is on floating rate at the time of pre-payment.
4. Other Loan Categories: In cases not covered above, pre-payment charges (if any) must align with the lender’s approved policy:
(a) For term loans: Charges to be based on amount prepaid.
(b) For cash credit/overdrafts: Charges (on early closure) to be levied only on an amount not exceeding the sanctioned limit.
5. Exceptions and Additional Protections
(a) No charges if borrower notifies intention not to renew CC/ OD before expiry and closes on due date.
(b) No charges if pre-payment is initiated by the lender.
(c) No retrospective charges for previously waived fees.
6. Transparency and Disclosure Requirements: Applicability of pre-payment charges must be clearly disclosed in the sanction letter, loan agreement, Key Facts Statement (KFS) (if applicable) and no undisclosed charges shall be levied.
7. Repeal of Earlier Guidelines: With the issuance of these Pre-payment Directions, the prior instructions in circulars/ Master Directions listed in the Annex of this circular shall be repealed, effective January 01, 2026. However, such circulars shall be deemed valid for the period before these Pre-payment Directions take effect.
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12878&Mode=0