RBI Issues New Directions on Pre-Payment Charges for Loans

Context:

To enhance access to affordable credit for Micro and Small Enterprises (MSEs) and resolve customer grievances, the Reserve Bank of India (RBI) has issued the RBI (Pre-payment Charges on Loans) Directions, 2025, effective January 1, 2026.

Key Highlights:

Applicability

• Effective from: January 1, 2026
• Applies to:
  • Commercial banks (excluding Payments Banks)
  • Co-operative banks
  • NBFCs (including NBFC-UL, NBFC-ML)
  • All India Financial Institutions (AIFIs)

What is Pre-payment Charges?

Prepayment charges on loans, also known as prepayment penalties, are fees that lenders impose on borrowers who repay their loans before the scheduled end date. These charges compensate the lender for the interest income they would have earned had the loan been repaid according to the original terms. 

Pre-Payment Charges Provisions

No Pre-Payment Charges (Floating Rate Loans)

• For personal loans (non-business purposes):
  • No charges for individuals (with/without co-obligants)
• For business loans to individuals and MSEs:
  • No charges if lender is:
    • Commercial Bank (excluding SFBs, RRBs, LABs)
    • Tier-4 Primary (Urban) Co-operative Bank
    • NBFC-UL
    • AIFI
  • No charges up to ₹50 lakh if lender is:
    • Small Finance Bank (SFB)
    • Regional Rural Bank (RRB)
    • Tier-3 Urban Co-operative Bank
    • State & Central Co-operative Banks
    • NBFC-ML

Universal Application

• Applies regardless of the source of pre-payment (borrower’s own funds or loan refinance)
• No minimum lock-in period required

Dual/Special Rate Loans

• Applicability depends on whether the loan is floating at the time of pre-payment

Other Key Provisions

• Cash Credit/Overdraft:
  • No charge if borrower informs in advance of non-renewal and closes on due date
  • If pre-paid early, charges only on sanctioned limit
• Disclosure Mandate:
  • All charges must be clearly disclosed in the sanction letter, loan agreement, and Key Facts Statement (KFS)
• No Retrospective Charges:
  • REs cannot re-impose previously waived charges
• No Charges if Prepayment Initiated by RE
• Charges in Other Cases:
  • As per RE’s approved policy, but based on prepaid amount or sanctioned limit as applicable

RBI