Pre-paying loans will get easier, as RBI abolishes charges for advances on business loans
The RBI said that banks and NBFCs are not permitted to levy foreclosure charges/pre-payment penalties on any floating rate term-loan sanctioned to individual borrowers with or without co-obligant(s) for purposes other than business.
The Reserve Bank of India (RBI) on Wednesday directed banks and other lenders not to levy any pre-payment charges on all floating-rate loans and advances, including for business purposes, availed by individuals and micro and small enterprises (MSEs).
The directions will apply to all loans and advances sanctioned or renewed on or after January 1, 2026.
In terms of extant guidelines, banks and NBFCs are not permitted to levy foreclosure charges/pre-payment penalties on any floating rate term-loan sanctioned to individual borrowers with or without co-obligant(s) for purposes other than business.
In a circular, the Reserve Bank said the availability of easy and affordable financing to micro and small enterprises (MSEs) is of paramount importance.
However, the RBI's supervisory reviews have indicated divergent practices among regulated entities (REs) with regard to the levy of pre-payment charges in case of loans sanctioned to MSEs, which lead to customer grievances and disputes, it said.
Based on a review of the supervisory findings and public feedback received on a draft circular, the central bank has issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025.
"For all loans granted for business purpose to individuals and MSEs, with or without co-obligant(s), 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", said the directions.
Also, for all loans granted for purposes other than business to individuals, with or without co-obligant(s), a regulated entity (RE) shall not levy pre-payment charges, it said.
"A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFCML shall not levy any pre-payment charges on loans with sanctioned amount/limit up to Rs 50 lakh," it added.
The RBI also said the norms will 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.
The RBI further said that 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 the due date".
According to the directions, the applicability or otherwise of pre-payment charges will be clearly disclosed in the sanction letter and loan agreement.
Edited by Suman Singh