Jul 7, 2025

RBI (Pre-payment Charges on Loans) Directions, 2025 – A Regulatory Overview for Lenders and NBFCs

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The Reserve Bank of India (RBI) has consistently received complaints through its Ombudsman framework regarding arbitrary levies imposed by banks and financial institutions. Among the most contentious issues are pre-payment or foreclosure charges, especially where borrowers seek to repay loans early or transfer their loans to other lenders offering more competitive interest rates or superior customer service.

To discourage such exits, many lenders embed restrictive clauses in loan agreements, citing potential asset-liability mismatches (ALM) due to premature repayments. While these concerns are not without merit, RBI has taken a balanced approach in safeguarding borrower interest without undermining prudent lending practices.

Background and Regulatory Rationale

Through earlier circulars and under the Scale-Based Regulation (SBR) framework applicable to NBFCs, RBI had already restricted foreclosure charges on floating rate loans granted to individual borrowers. However, concerns remained as lenders continued to impose such charges citing contractual terms, particularly where loans were repaid during a lock-in period. Moreover, the earlier regulatory stance did not extend protection to business loans, including those availed by Micro and Small Enterprises (MSEs) — segments that play a critical role in employment generation and economic activity, especially in the unorganised sector.

To address these gaps and ensure uniform treatment across the lending ecosystem, RBI has now issued comprehensive directions titled the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025, which aim to:

  • Standardise practices across all lenders,
  • Broaden borrower protection, and
  • Promote transparency in loan pricing and closure conditions.

Applicability

The Directions apply to:

  • Scheduled Commercial Banks (SCBs)
  • Small Finance Banks (SFBs)
  • Co-operative Banks (State, Urban, and Tier-based)
  • Regional Rural Banks (RRBs)
  • Non-Banking Financial Companies (NBFCs) classified under Middle and Upper.

Classification of Loans

1. Floating Rate Loans:

  • No pre-payment or foreclosure charges can be levied.
  • In case of hybrid/dual rate loans, the floating component at the time of prepayment will trigger the no-charge rule.

2. Fixed Rate Loans:

  • Charges may be levied as per the lender’s approved policy.
  • However, such charges must:
    • Be disclosed upfront in the loan agreement, sanction letter, and Key Facts Statement (KFS);
    • Be proportional (e.g., charges on the prepaid amount only, not on the entire sanctioned loan);
    • Not be retrospective.

3. Cash Credit / Overdraft Accounts:

  • No charges if the borrower provides advance intimation of non-renewal.
  • Otherwise, any applicable charge is capped at the sanctioned limit.

Eligible Borrowers and Loan Purpose

A. Individual Borrowers (Personal/Non-business Loans):

  • No foreclosure or prepayment charges regardless of the lender or amount.

B. Business Loans to Individuals and MSEs:

Lender Category

Relief Granted

SCBs, Tier 4 Co-operative Banks, Upper Layer NBFCs, AIFIs

No prepayment charges permitted.

SFBs, RRBs, State Co-op Banks, Middle Layer NBFCs

No foreclosure charges on loans up to ₹50 lakh.

This is a significant policy expansion aimed at addressing financial burdens on MSEs and entrepreneurial borrowers.

Key Compliance and Disclosure Requirements

  • Loan Documents (including sanction letter and KFS) must clearly disclose whether any prepayment charge applies.
  • No re-imposition of waived charges is permitted later during prepayment.
  • If prepayment is initiated by the lender (e.g., due to loan sale or restructuring), no fee can be levied.
  • Source-neutrality: Whether repayment is made using personal funds or through refinance from another lender, no distinction or penalty is allowed.
  • Lock-in clauses are not permitted: Borrowers have the regulatory right to prepay at any time without penalty.

Effective Date

  • These Directions will apply to all loans and advances sanctioned or renewed on or after January 1, 2026.
  • The existing protection for individual borrowers (with floating-rate personal loans) continues without change.

Strategic Implications for NBFCs and Banks

The Directions are likely to:

  • Enhance competition and customer-centricity in retail and small business lending.
  • Encourage lenders to shift focus towards improving interest rate offerings, product features, and service quality.
  • Prompt a review of loan pricing models as reliance on non-interest income (such as prepayment charges) reduces.

Lenders, particularly NBFCs in the Middle and Upper layers, must revisit their standard loan agreements, disclosure templates, and internal policies to align with these Directions well before the effective date. Failure to comply may invite supervisory scrutiny and reputational risk.

Conclusion

The RBI (Pre-payment Charges on Loans) Directions, 2025 marks a significant step in aligning lending practices with principles of transparency, fairness, and borrower protection. For NBFCs, this not only necessitates legal and operational readiness but also opens an opportunity to build borrower trust in a competitive credit market.

AUTHORED BY

Mr. Nitesh Latwal

Associate Partner

FCS, LLB

nitesh@indiacp.com

+91 11 40622249

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