In a significant step toward enhancing credit accessibility and transparency, the Reserve Bank of India (RBI) has issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025. These new guidelines are designed to protect the interests of individual and Micro and Small Enterprise (MSE) borrowers, promoting borrower mobility and reducing hidden costs associated with switching lenders.
The Need for Reform
The availability of affordable and flexible financing is essential for the survival and growth of MSEs. However, RBI’s supervisory reviews revealed that regulated entities (REs) were adopting inconsistent practices regarding pre-payment charges on loans, particularly to MSEs. Some lenders included restrictive clauses in loan contracts that discouraged borrowers from refinancing or switching to more favorable terms offered by other financial institutions. These practices not only hindered fair competition but also led to customer dissatisfaction and grievances.
Recognizing this, the RBI released a draft circular in February 2025 for public feedback, which culminated in the current directions announced under its statutory powers. These directions will come into effect for all loans sanctioned or renewed on or after January 1, 2026.
Who is Covered?
The directions apply to a wide spectrum of financial institutions, including:
- Commercial banks (excluding payments banks),
- Co-operative banks,
- Non-Banking Financial Companies (NBFCs), and
- All India Financial Institutions.
Key Highlights of the Directions
- No Pre-payment Charges for Individuals (Non-business loans):
All individuals taking floating-rate loans for non-business purposes will not face any pre-payment penalties, regardless of co-obligants or the source of funds used for repayment. - MSEs and Business Loans for Individuals:
- No charges for such borrowers when loans are offered by:
- Commercial banks (excluding small finance, regional rural, and local area banks),
- Tier 4 Primary (Urban) Co-operative banks,
- NBFC-ULs (Upper Layer NBFCs),
- All India Financial Institutions.
- No charges up to ₹50 lakh for borrowers from:
- Small Finance Banks,
- Regional Rural Banks,
- Tier 3 Urban Co-operative Banks,
- State and Central Co-operative Banks,
- NBFC-MLs (Middle Layer NBFCs).
- No charges for such borrowers when loans are offered by:
- No Lock-in Period Requirement:
Borrowers are free to pre-pay without a minimum tenure restriction. - Dual/Special Rate Loans:
Whether the loan is under fixed or floating rate at the time of pre-payment will determine the applicability of these directions. - Disclosure and Transparency:
All applicable pre-payment terms must be disclosed clearly in the sanction letter, loan agreement, and the Key Facts Statement (KFS), wherever applicable. Undisclosed charges cannot be levied. - Other Provisions:
- Charges, if allowed, must be proportionate to the prepaid amount (for term loans) or the sanctioned limit (for overdraft facilities).
- No charges are allowed if the borrower opts out of a facility with due notice and closes it on time.
- No retrospective charges or fees are permitted, nor charges in cases where pre-payment is initiated by the RE itself.
