RBI New Circular on Pre-payment Charges on Loans 2025
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The Reserve Bank of India (RBI) has released a new circular on pre-payment charges on Loans. Some banks in India charge pre-payment fees on loans if borrowers wish to close their loans earlier than the repayment period. For example: If you take car loan for 5 years but decide to close loan in 4 years then you will have to pay pre-payment charges.
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. Based on a review of the supervisory findings and public feedback received on the draft circular, the RBI has released the new circular.
These Directions shall be applicable to all loans and advances sanctioned or renewed on or after January 1, 2026. These Directions shall apply to all commercial banks (excluding payments banks), co-operative banks, NBFCs and All India Financial Institutions.
Banks shall follow below Directions regarding levy of pre-payment charges on all floating rate loans and advances:
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;
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.
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.
In case of cash credit/ overdraft facilities, no pre-payment charges shall be applicable if the borrower intimates the bank 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 the due date.
Bank shall not levy any charges where pre-payment is effected at the instance of the bank.
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.
Bank shall not levy any charges/ fees retrospectively at the time of pre-payment of loans, which were waived off earlier by the Bank.
