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Pre-payment Charges on Loans

Reserve Bank of India (RBI) has issued directions on pre-payment charges on loans.

What issues were observed by RBI during supervisory reviews?

  • Divergent practices were observed 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. 
  • Certain REs were found to include restrictive clauses in loan contracts / agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service.

To whom shall the directions be applicable?

The directions shall apply to all commercial banks (excluding payments banks), co-operative banks, Non-Banking Financial Companies (NBFCs) and All India Financial Institutions (AIFIs).

To which loans shall the direction be applicable?

The directions shall be applicable to all floating rate loans and advances sanctioned or renewed on or after January 01, 2026.

Which loans shall be exempt from pre-payment charges?

  • For all floating rate loans granted for purposes other than business to individuals, with or without co-obligants, REs shall not levy pre-payment charges.
  • For all floating rate loans granted for business purpose to individuals and MSEs, with or without co-obligants –
    • Commercial Bank (excluding Small Finance Bank, Regional Rural Bank and Local Area Bank), Tier 4 Primary (Urban) Co-operative Bank, NBFC-Upper Layer (NBFC-UL), and AIFIs shall not levy any pre-payment charges.
    • Small Finance Bank, Regional Rural Bank, Tier 3 Primary (Urban) Co-operative Bank, State Cooperative Bank, Central Cooperative Bank and NBFC-Middle Layer (NBFC-ML) shall not levy any pre-payment charges on loans with sanctioned amount / limit up to ₹50 lakh.

What are other guidelines on levy of pre-payment charges on loans?

  • The directions 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 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 pre-payment.
  • For loans other than those exempt from pre-payment charges as mentioned above, pre-payment charges, if any, shall be as per the approved policy of the RE. 
    • 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 the due date.
  • An RE shall not levy any charges where pre-payment is effected at the instance of the RE.
  • The applicability or otherwise of pre-payment charges shall be clearly disclosed in the sanction letter and loan agreement. In case of loans and advances where Key Facts Statement (KFS) is to be provided, the same shall also be mentioned in the KFS. No pre-payment charges which have not been disclosed as specified herein shall be charged by an 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.


References

Reserve Bank of India. (2025, July 02). 'Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025'. Retrieved from https://website.rbi.org.in/web/rbi/-/notifications/reserve-bank-of-india-pre-payment-charges-on-loans-directions-2025


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