RBI (Pre-payment Charges on Loans) Directions, 2025 issued, No more Prepayment Penalty on Business Loans

TNI Bureau: In a major relief for individual borrowers who have availed loans for non-business purposes, the Reserve Bank of India (RBI) issued a direction prohibiting the banks and other regulated lenders not to charge the pre-payment penalties on floating rate.

The RBI issued the direction which it named as ‘Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025’ after noticing divergent practices amongst Regulated Entities (REs) with regard to levy of pre-payment charges in case of loans sanctioned to Micro and Small Enterprises (MSEs) which lead to customer grievances and disputes.

In a notification the RBI said that the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 shall be applicable to all loans and advances sanctioned or renewed on or after January 1, 2026. It shall apply to all commercial banks (excluding payments banks), cooperative banks, NBFCs and All India Financial Institutions.

An Regulated Entity (RE) shall adhere to the following Directions regarding levy of pre-payment charges on all floating rate loans and advances:

For all loans granted for purposes other than business to individuals, with or without co-obligant(s), an RE shall not levy pre-payment charges;

For all loans granted for business purpose to individuals and MSEs, with or without co-obligant(s):

(a) A commercial bank (excluding Small Finance bank, Regional Rural bank and Local Area bank), a Tier 4 Primary (Urban) Co-operative bank, an NBFC-UL, and an All India Financial Institution shall not levy any pre-payment charges.

(b) A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFCML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to Rs 50 lakh.

The Directions at paragraphs 5(i) and 5(ii) above shall be applicable irrespective of the source of funds used for pre-payment of loans, either in part or in full, and without any minimum lock-in period.

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.

In cases other than those mentioned at paragraphs 5(i) and 5(ii) above, pre-payment charges, if any, shall be as per the approved policy of the RE. However, in case of term loans, pre-payment charges, if levied by the RE, shall be based on the amount being prepaid. In case of cash credit/ overdraft facilities, pre-payment charges on closure of the facility before the due date shall be levied on an amount not exceeding the sanctioned limit.

In case of cash credit/ overdraft facilities, no pre-payment charges shall be applicable if the borrower intimates the RE of his/ her/ its intention not to renew the facility before the period as stipulated in the loan agreement, provided that the facility gets closed on 3 the due date.

An RE shall not levy any charges where pre-payment is effected at the instance of the RE.

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.