FILE PHOTO: The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai November 2, 2010. REUTERS
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DANISH SIDDIQUI
The Reserve Bank of India (RBI) has asked lenders to not levy pre-payment charges on all floating rate loans and advances granted for business purpose to individuals and MSEs (micro and small enterprises), with or without co-obligant(s).
Further, a lender cannot levy any charges where pre-payment is effected at its instance. The lender cannot levy any charges/ fees retrospectively at the time of pre-payment of loans, which were waived off earlier.
In its Directions on Pre-payment Charges on Loans, which will be applicable to all loans (‘term loans’ under this circular will include term loans as well as demand loans) and advances sanctioned or renewed on or after January 1, 2026, RBI said a commercial bank, a Tier 4 Urban Co-operative bank/UCB (with deposits exceeding Rs 10,000 crore), an NBFC-UL (non-banking finance company – upper layer), and an All India Financial Institution cannot not levy any pre-payment charges.The aforementioned clause excludes regulated entities (REs/ lenders) such as Small Finance bank (SFB), Regional Rural Bank (RRB) and Local Area bank (LAB).Further, a SFB, a RRBI, a Tier 3 UCB (with deposits more than ₹1,000 crore and up to ₹10,000 crore), State Cooperative Bank, Central Cooperative Bank and an NBFC-ML (non-banking finance company – middle layer) cannot levy any pre-payment charges on loans with sanctioned amount/ limit up to ₹50 lakh.The aforementioned Directions will 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.In the case of loans granted for purposes other than business to individuals, with or without co-obligant(s), a lender cannot levy pre-payment charges.The central bank noted that its supervisory reviews indicated divergent practices amongst Regulated Entities (REs/ lenders) with regard to levy of pre-payment charges in case of loans sanctioned to MSEs which lead to customer grievances and disputes.Further, 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.RBI said applicability of the latest 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.In case of term loans, pre-payment charges, if levied by the RE, will 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 will be levied on an amount not exceeding the sanctioned limit.
Published on July 3, 2025