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Informist, Wednesday, Jul. 2, 2025

--RBI issues directions on pre-payment charges on loans 

--RBI: Directions on pre-payment charges on loans applicable from Jan 1 
 

NEW DELHI – The Reserve Bank of India Wednesday notified directions on pre-payment charges on loans. The central bank said the directions would be applicable on all loans and advances sanctioned or renewed from Jan. 1.

The RBI had issued a draft circular on the levy of foreclosure charges and pre-payment penalties on loans on Feb. 21, citing customer grievances against regulated entities. The directions significantly cut down loans on which pre-payment charges can apply.

On all floating rate loans, regulated entities shall no longer levy any pre-payment charges given for purposes other than business to individuals, the RBI said. For business loans to individuals and micro and small enterprises, most commercial banks, tier 4 urban co-operative banks, an upper layer non-banking financial company, and an All India Financial Institution will not levy any pre-payment charges, the notification said.

Small finance banks, regional rural banks, a tier 3 urban co-operative bank, central and state co-operative banks and middle layer NBFCs shall not levy pre-payment charges on sanctioned loans up to INR 5 million, the RBI said. The directions are applicable irrespective of mode of payment, in part or in full, without a lock-in period and whether or not there are any co-obligants.

"Applicability of above Directions for dual/ special rate (combination of fixed and floating rate) loans will depend on whether the loan is on floating rate at the time of prepayment," the notification said.

In cases other than specified, pre-payment charges shall be as per the approved policy of the regulated entity. Pre-payment charges on term loans should be based on the amount prepaid, the RBI said. Pre-payment charges on closure of cash credit or overdraft faclity before the due date will not be levied on an amount higher than the sanctioned amount. No charges would apply if the borrower informs the regulated entity beforehand of their intention to not renew the facility, as long as cash credit or overdraft facility is closed on the due date.

Pre-payment at the insistence of the lender itself shall not draw any pre-payment charges, the regulator said. The applicability of pre-payment charges will be clearly disclosed in the sanction letter and loan agreement, and mentioned in the Key Fact Statement of the loan where applicable. Pre-payment charges not disclosed in this format cannot be levied by a regulated entity, the notification said. Moreover, any separate charges or fees which were earlier waived by the regulated entity cannot be levied at the time of pre-payment of the loan.

The new norms are applicable to all commercial banks excluding payments banks, co-operative banks, NBFCs and All India Financial Institutions. Ten other circulars and master directions issued by the RBI shall be repealed when these directions come into force Jan. 1, the notification said.  End

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

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