C&M E-Alert: RBI: Prepayment Charges on Loans imposed by Regulated Entities Directions, 2025

The Reserve Bank of India (“RBI”) has issued the Prepayment Charges on Loans Directions, 2025 on July 2, 2025 (“Directions”), which will come into effect for all loans sanctioned or renewed on or after January 1, 2026 (“Effective Date”).

OBJECTIVE

The objective of these Directions is to standardise the levy of prepayment or foreclosure charges on loans and advances across banks and Non-Banking Finance Company “(NBFC”) in India. These Directions also aim to readdress the inconsistent practices followed by Regulated Entities (“REs”) in levying prepayment charges on loans sanctioned to Micro and Small Enterprises (“MSEs”), as defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which have often led to customer grievances and disputes. Additionally, it has been observed by the RBI that some REs include restrictive clauses in loan contracts or agreements, discouraging borrowers from switching to other lenders offering lower interest rates or better terms, and that issue is also sought to be addressed.

To resolve these issues and ensure fair treatment of borrowers, the RBI has issued these Directions to bring consistency, enhance transparency, and prevent anti-competitive practices in the credit market.

APPLICABILITY

These Directions shall apply to all commercial banks (excluding Payments Banks), all NBFCs (including Middle Layer and Upper Layer), cooperative banks (Urban and Rural), and All India Financial Institutions (AIFIs).

They are applicable to all term loans and demand loans sanctioned or renewed on or after the Effective Date, regardless of whether the prepayment is made using the borrower’s own funds or through a takeover by another lender.

1. Zero prepayment charges for retail borrowers on floating rates loans & advances not intended for business purposes (such as personal loans, car loans, education loans, etc.) availed by individual borrowers.

2. For all floating rates loans & advances granted for business purpose to individuals and MSEs: No prepayment penalty can be charged if the lender is:

   • A commercial bank (excluding Small Finance Banks, Regional Rural Banks (RRBs), Local Area Banks)

   • A Tier 4 Primary Urban Co-operative Bank

   • An upper-layer NBFC

   • An All-India Financial Institution

   For other institutions such as Small Finance Banks, RRB, a Tier-3 primary (urban) co-operative bank, state co-operative banks, central co-operative banks, and NBFC-Middle Layers: No foreclosure charges are permitted on all floating rate loans & advances up to INR 50 lakh (Indian Rupees Fifty Lakhs) sanctioned for business purposes.

   The Directions mentioned in Paragraphs 1 and 2 shall be applicable irrespective of any minimum lock-in period.

3. All applicable charges must be clearly disclosed upfront in the loan agreement, sanction letter, and the Key Facts Statement (KFS) where applicable. Any charges not disclosed in these documents cannot be recovered from the borrower.

4. Dual/Hybrid Rate Loans (Combination of fixed and floating rate): Prepayment charge exemption applies if the loan is in floating rate phase at the time of prepayment.

5. In cases not specifically covered under these Directions, REs are permitted to levy prepayment charges in accordance with their board-approved policy. However, such charges are subject to the following limitations:

   • In case of the term loans, prepayment charges can be levied only on the amount actually prepaid.

   • In the case of cash credit (CC) and overdraft (OD) facilities, pre-payment charges on closure of the facility before the due date may be levied, but only on an amount not exceeding the sanctioned limit. However, no such charges shall be applicable if the borrower informs the RE of his/her/its intention not to renew the facility within the period stipulated in the loan agreement, provided that the facility is closed on the due date.

6. An RE shall not levy any charges/ fees retrospectively at the time of pre-payment of loans, which were waived off earlier by the RE.

   
   

 Comparative Chart: Prepayment Charges by REs

Type of Regulated Entities (REs)	Borrower	Can Charge Prepayment	Permitted Cases
Scheduled Commercial Banks	Individual borrowers with floating rate loans	No	Permitted for fixed rate loans if terms allow; not allowed for floating rate loans to individuals
NBFCs (incl. HFCs)	Individual borrowers with floating rate loans	No	Permitted for fixed rate loans or for non-individual borrowers if terms allow
Co-operative Banks	Individual borrowers with floating rate loans	No	Same as Scheduled Commercial Banks
Regional Rural Banks (RRBs)	Individual borrowers with floating rate loans	No	Same as Scheduled Commercial Banks

CONCLUSION

 The Directions issued by the RBI aim to provide flexibility to borrowers, particularly MSEs and individuals, by removing pre-payment penalties and other contractual barriers that often discourage switching from high-cost loans. These measures are expected to promote transparency through mandatory disclosure requirements and by prohibiting the retrospective imposition of pre-payment charges.

Further, the requirement for REs to implement a board-approved policy on pre-payment charges, and to ensure that loan documents clearly mention such charges, will protect borrowers from arbitrary or hidden costs.

The RBI has issued these Directions under the powers conferred by Sections 21, 35A, and 56 of the Banking Regulation Act, 1949, Sections 45JA, 45L, and 45M of the Reserve Bank of India Act, 1934, and Section 30A of the National Housing Bank Act, 1987.

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