RBI Bans Pre-Payment Charges for MSEs and Individuals on Floating Rate Loans: A Major Push Towards Fair Lending and Borrower Mobility
- REEDLAW
- Jul 5
- 2 min read
Updated: Jul 5
On 2 July 2025, the Reserve Bank of India (RBI), through its notification has issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025, effective for all loans and advances sanctioned or renewed on or after January 1, 2026. These Directions aim to eliminate restrictive lending practices and foster a more competitive and transparent borrowing environment, especially for Micro and Small Enterprises (MSEs) and individual borrowers.
The move is driven by supervisory findings that revealed inconsistent and often restrictive pre-payment practices among regulated entities (REs), which caused customer grievances and discouraged loan switching to better terms or lower interest rates. In response, the RBI issued a draft circular on February 21, 2025, inviting public feedback, which has now culminated in these binding directions.
Key provisions of the Directions include:
Zero Pre-payment Charges on Floating Rate Loans:
Individuals (non-business purposes): No RE shall levy pre-payment charges on floating rate loans availed by individuals, regardless of co-obligants.
MSEs and Individuals (business purposes):
For loans from scheduled commercial banks (excluding SFBs, RRBs, and LABs), Tier 4 Urban Cooperative Banks, NBFC-ULs, and AIFIs, no pre-payment charges shall be levied.
For loans up to ₹50 lakh from SFBs, RRBs, Tier 3 Urban Cooperative Banks, State/Central Cooperative Banks, and NBFC-MLs, no pre-payment charges shall apply.
Uniform Applicability Without Lock-in Period:
These protections apply regardless of the source of pre-payment (e.g., balance transfer) and without any minimum lock-in.
Dual/Special Rate Loans:
The applicability of the Directions depends on whether the loan is on a floating rate at the time of pre-payment.
Other Cases:
Pre-payment charges, where permitted, must be in line with the RE’s approved policy.
For term loans, charges must be proportionate to the amount prepaid.
For cash credit/OD facilities, charges (if any) must be limited to the sanctioned amount and can be avoided if the borrower opts not to renew the facility before the due date.
Mandatory Disclosures and Fair Practices:
All applicable pre-payment terms must be clearly disclosed in the sanction letter, loan agreement, and the Key Facts Statement (KFS).
No retrospective charges or previously waived fees may be imposed.
No charges may be levied if pre-payment is initiated by the RE.
Repeal of Prior Circulars:
Upon the Directions taking effect, all previous RBI circulars and directions related to pre-payment charges (listed in the Annexe) shall be repealed.
These Directions reflect RBI’s firm regulatory stance to ensure freedom of choice and fair lending conditions, thereby enabling MSEs and individuals to access more competitive credit options without fear of penalty or unfair contractual restrictions. The Directions mark a significant reform towards borrower empowerment, market transparency, and enhanced credit culture in the Indian financial system.
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