Executive Summary:
The Reserve Bank of India (RBI) issued these directions regarding prepayment charges on loans, aiming to provide affordable financing to Micro and Small Enterprises (MSEs) and address divergent practices among Regulated Entities (REs). These directions, effective January 1, 2026, outline rules for levying prepayment charges on floating rate loans and advances. They apply to commercial banks (excluding payments banks), cooperative banks, NBFCs, and All India Financial Institutions.
Key Points / Main Content:
Applicability and Scope:
* These Directions are called the Reserve Bank of India Prepayment Charges on Loans Directions, 2025.
* Applicable to loans sanctioned or renewed on or after January 1, 2026.
* Applies to all commercial banks (excluding payments banks), co-operative banks, NBFCs, and All India Financial Institutions.
Prepayment Charges on Floating Rate Loans:
* No prepayment charges on loans to individuals (with or without co-obligants) for non-business purposes.
* No prepayment charges for loans granted for business purposes to individuals and MSEs (with or without co-obligants) levied by commercial banks excluding Small Finance bank, Regional Rural bank and Local Area bank, a Tier 4 Primary Urban Cooperative bank, an NBFC-UL, and an All India Financial Institution.
* Small Finance Banks, Regional Rural Banks, Tier 3 Primary Urban Co-operative banks, State Co-operative banks, Central Co-operative banks and NBFC-MLs shall not levy any prepayment charges on loans up to a sanctioned limit of ₹50 lakh.
* The above directions apply regardless of the prepayment source or any minimum lock-in period.
* For dual special rate combination of fixed and floating rate loans, applicability depends on whether the loan is on floating rate at the time of prepayment.
Other Loan Prepayment Rules:
* For cases other than those specified above, prepayment charges should follow the RE's approved policy.
* For term loans, prepayment charges must be based on the amount being prepaid.
* For cash credit/overdraft facilities, prepayment charges on closure before the due date are levied on an amount not exceeding the sanctioned limit.
* No prepayment charges apply to cash credit/overdraft facilities if the RE is notified of non-renewal before the period stipulated in the loan agreement, provided the facility closes on the due date.
* No charges can be levied if prepayment is initiated by the RE.
Disclosure and Transparency:
* Applicability of prepayment charges must be clearly disclosed in the sanction letter, loan agreement, and Key Facts Statement (KFS).
* REs cannot levy undisclosed prepayment charges.
* REs cannot retrospectively levy previously waived charges/fees.
Repeal Provisions:
* Instructions in specified circulars/Master Directions are repealed from the effective date of these Directions.
Impact Analysis:
Commercial Banks, Co-operative Banks, NBFCs, and All India Financial Institutions:
* Impact: Must comply with the new directions regarding prepayment charges on loans.
* Action Required: Review and update loan policies, sanction letters, loan agreements, and Key Facts Statements (KFS) to align with the new guidelines. Ensure staff is trained on the updated policies.
Micro and Small Enterprises (MSEs) and Individuals:
* Impact: Benefit from the elimination or reduction of prepayment charges on certain loans.
* Action Required: Understand the revised prepayment charge policies of their lenders and factor this into their borrowing decisions.
Reserve Bank of India (RBI):
* Impact: Responsible for supervising and enforcing the new directions.
* Action Required: Monitor REs compliance with the directions through supervisory reviews.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and formulating monetary policy.
Micro and Small Enterprises (MSEs): Small businesses as defined by the Micro, Small and Medium Enterprises Development MSMED Act, 2006.
Regulated Entities (REs): Entities regulated by the Reserve Bank of India, such as commercial banks, co-operative banks, and Non-Banking Financial Companies (NBFCs).
Banking Regulation Act, 1949: An act of the Parliament of India that regulates the Indian banking industry.
Reserve Bank of India Act, 1934: The legislation that established the Reserve Bank of India.
National Housing Bank Act, 1987: The act that established the National Housing Bank in India.
Mumbai, Maharashtra: A city in India where the central office of Reserve bank of India is located.
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006: An act of the Parliament of India to facilitate the promotion and development and enhance the competitiveness of micro, small and medium enterprises.
भारतीय �रज़वर् बैंक
RESERVE BANK OF INDIA
RBI/2025-26/64
DoR.MCS.REC.38/01.01.001/2025-26 July 2, 2025
Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025
Availability of easy and affordable financing to Micro and Small Enterprises (MSEs)1 is of
paramount importance. However, Reserve Bank’s supervisory reviews have indicated
divergent practices amongst Regulated Entities (REs) 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 have been 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. Accordingly, as announced
in the Statement on Developmental and Regulatory Policies dated October 9, 2024, a
draft circular in this regard was issued on February 21, 2025 for public consultation.
2. Based on a review of the supervisory findings and public feedback received on the
draft circular, the Reserve Bank, in exercise of the powers conferred by Sections 21, 35A
and 56 of the Banking Regulation Act, 1949, Sections 45JA, 45L and 45M of the Reserve
Bank of India Act, 1934 and Section 30A of the National Housing Bank Act, 1987, hereby
issues the Directions hereinafter specified.
3.(i) These Directions shall be called the Reserve Bank of India (Pre-payment Charges
on Loans) Directions, 2025.
(ii) These Directions shall be applicable to all loans2 and advances sanctioned or
renewed on or after January 1, 2026.
1 As defined in Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
2 The term ‘loans’, for the purpose of this circular, shall include term loans as well as demand loans
िविनयमन िवभाग, केंद्रीय कायार्लय, 12वी ंऔर 13वी ंमंिज़ल, केंद्रीय कायार्लय भवन, शहीद भगत िसंह मागर्, मुंबई 400001
टेलीफोन /Tel No: 22601000 फै�/ Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Regulation, Central Office, 12th & 13th Floor, Central Office Building, Shaheed Bhagat Singh Marg, Mumbai – 400001
Tel No: 91-22-22601000/ 22820710
Caution: RBI never sends mails, SMSs or makes calls asking for personal information like bank account details, passwords, etc. It never keeps or
offers funds to anyone. Please do not respond in any manner to such offers.4. These Directions shall apply to all commercial banks (excluding payments banks), co-
operative banks, NBFCs and All India Financial Institutions.
5. An RE shall adhere to the following Directions regarding levy of pre-payment charges
on all floating rate loans and advances:
(i) 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;
(ii) 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) Co-
operative bank, State Cooperative bank, Central Cooperative bank and an NBFC-
ML shall not levy any pre-payment charges on loans with sanctioned amount/ limit
up to ₹50 lakh.
(iii) 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.
(iv) 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 pre-
payment.
6. 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.
7. 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
2the due date.
8. An RE shall not levy any charges where pre-payment is effected at the instance of the
RE.
9. The applicability or otherwise of pre-payment charges shall be clearly disclosed in the
sanction letter and loan agreement. Further, in case of loans and advances where Key
Facts Statement (KFS) is to be provided as specified in the Reserve Bank’s circular dated
April 15, 2024 on ‘Key Facts Statement for Loans and Advances’, 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.
10. 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.
11. Repeal Provisions
With the issue of these Directions, the instructions contained in the circulars/ Master
Directions mentioned in Annex, issued by the Reserve Bank, shall stand repealed from
the effective date of these Directions. All the repealed circulars shall be deemed to have
been in force during the relevant periods, prior to the coming into effect of these
instructions.
(Veena Srivastava)
Chief General Manager
3Annex
List of circulars/ instructions in Master Directions repealed
Sr. Circular No. Date Subject
No.
1. DBOD.No.Dir.BC.107/13.03.0 June 5, 2012 Home Loans - Levy of Fore-
0/2011-12 closure Charges/ Pre-
payment Penalty
2. RPCD.CO.RCBD.BC.No.84/0 June 15, 2012 Home Loans - Levy of Fore -
3.03.01/2011-12 Closure Charges/ Pre-
payment Penalty
3. RPCD.CO.RRB.BC.No.85/03. June 18, 2012 Home Loans - Levy of Fore -
05.033/2011-12 Closure Charges/ Pre-
payment Penalty
4. UBD.BPD.(PCB)CIR.No.41/12 June 26, 2012 Home Loans - Levy of Fore-
.05.001/2011-12 closure Charges/ Pre-
payment Penalty by Urban
Co-operative Banks (UCBs)
5. DBOD.Dir.BC.No.110/13.03.0 May 7, 2014 Levy of Foreclosure Charges/
0/2013-14 Pre-payment Penalty on
Floating Rate Term Loans
6. UBD.CO.BPD.PCB.Cir.No.64/ May 26, 2014 Levy of Foreclosure Charges/
12.05.001/2013-14 Pre-payment Penalty on
Floating Rate Term Loans
7. RPCD.CO.RCBD.RRB.BC.No. May 27, 2014 Levy of Foreclosure Charges/
102/07.51.013/2013-14 Pre-payment Penalty on
Floating Rate Term Loans
8. DBR.Dir.BC.No.08/13.03.00/2 August 2, 2019 Levy of Foreclosure Charges/
019-20 Pre-payment Penalty on
Floating Rate Term Loans
9. Master Direction – Non- February 17, Paragraph 85.7
Banking Financial Company – 2021 (as
Housing Finance Company amended from
(Reserve Bank) Directions, time to time)
2021
10. Master Direction – Reserve October 19, Paragraph 45.7.4
Bank of India (Non-Banking 2023 (as
Financial Company – Scale amended from
Based Regulation) Directions, time to time)
2023
4