RBI Issues Directions to Regulate Pre-Payment Charges on Loans

The Reserve Bank of India (RBI) has introduced new guidelines to regulate pre-payment charges on loans, aiming to empower borrowers and enhance transparency in the lending ecosystem. The directions, issued on July 2, 2025, will come into effect from January 1, 2026, and apply to all loans and advances sanctioned or renewed on or after this date.

These norms are applicable to Commercial Banks (excluding Payment Banks), Co-operative Banks, NBFCs, and All India Financial Institutions.

Under the new rules:

• For floating rate loans taken by individuals for non-business purposes, no pre-payment charges will be permitted.

• For floating rate loans taken by individuals and Micro & Small Enterprises (MSEs) for business purposes, major lenders, including Commercial Banks, Tier 4 Urban Co-operative Banks, NBFC-Upper Layer, and AIFIs, cannot levy pre-payment charges.

• For loans up to ₹50 lakh, entities like Small Finance Banks, Regional Rural Banks, and NBFC-Middle Layer are also prohibited from charging pre-payment fees.

These guidelines apply regardless of whether the pre-payment is partial or full and irrespective of the source of funds used.

Objective and Impact:

The move aims to curb anti-competitive practices that restrict borrowers from switching to better loan terms. It enhances credit mobility, promotes financial inclusion, and supports borrower rights, especially for MSEs that often depend on refinancing options.

While lenders may face a short-term loss of fee-based income and adjustments to internal systems, the long-term benefit lies in building a fair, transparent, and competitive credit market in India.