Reserve Bank of India (“RBI”) by notification dated 02.07.2025 notified the RBI (Pre-Payment Charges on Loans) Directions, 2025 (“RBI Pre-Payment Charges Directions”) to regulate activities of all commercial banks (excluding payment banks), cooperative banks, Non- Banking Finance Companies (“NBFCs”), and All India Financial Institutions (“AIFIs”) (collectively the “Regulated Entities” or “REs”) concerning levy of pre- payment charges in case of loans sanctioned to Micro and Small Enterprises (“MSEs”) and inclusion of restrictive clauses in loan agreements to deter borrowers from refinancing their loans from another lender either for availing lower rates of interest or better terms of service.
The salient features of the RBI Pre-Payment Charges Directions are as follows:
i. Applicability: The RBI Pre-Payment Charges Directions shall apply to all loans (both demand and term loans) and advances sanctioned or renewed after 01.01.2026.
ii. Floating rate loans and advances: The RBI Pre- Payment Charges Directions stipulate the following conditions to be complied with by REs on all floating loans and advances.
(a)No pre-payment charges shall be levied on loans granted for purposes other than business purposes, to individuals.
(b) Commercial banks (excluding Small Finance Banks (“SFB”), Regional Rural Bank (“RRB”), and local area bank), tier 4 Primary (Urban) Cooperative Banks (“PUCB”), NBFC-upper layer, and AIFI shall not levy pre-payment charges on loans granted for business purposes to individuals and MSEs (with or without co-obligant.
(c) SFB, RRB, Tier-3 PUCB, state cooperative banks, central cooperative banks, and NBFC-middle layer shall not levy any pre-payment charges for loans granted for business purposes to individuals and MSEs with sanctioned limits unto INR 50 Lakhs.
(d) The exemption from pre-payment charges shall be applicable irrespective of the source of funds being used for partial or full pre-payment and without any lock-in period. (e) In case of loans with a combination of fixed and floating interest rates, the RBI Pre-Payment Directions shall be applicable to such loans which have a floating interest rate at the time of pre- payment.
iii. Term Loans: In case of term loans, pre-payment charges to be levied by the RE shall be based on the amount being prepaid.
iv. Cash Credit/Overdraft Facilities: In case of cash credit/ overdraft facilities, closure of facilities before the due date, pre-payment charges payable shall be levied on an amount not exceeding the sanctioned limits. In case the borrower intimates the RE of their intention not to renew the facility before the period stipulated in the loan agreement and the facility is closed on the due date, no pre-payment charges shall be applicable.
v. The RE shall not levy any retrospective fees/charges that it had waived off earlier at the time of pre-payment of loans.
vi. The RE shall disclose the applicability of the pre- payment charges in the sanction letter, loan agreement, and key facts statement and the RE shall not levy any undisclosed pre-payment charges.