RBI has, by way of the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 (‘Pre-payment Directions’), prescribed a uniform regulatory framework governing the levy of pre-payment charges. The Pre-payment Directions, effective from January 1, 2026, prohibit the imposition of pre-payment charges in a wide range of scenarios including floating-rate loans availed by individuals and Micro and Small Enterprises (‘MSEs’) and also require disclosure of such charges upfront and prohibit retrospective levies.

The key features of the Pre-payment Directions are as follows:

i.    Applicability: The Pre-payment Directions apply to all commercial banks (excluding payments banks), co-operative banks, NBFCs and AIFIs.

ii.   Prohibition on Pre-payment Charges: No RBI RE is permitted to levy pre-payment charges on floating-rate loans granted to individuals for personal, non-business purposes, regardless of the source of pre-payment funds or any lock-in period.

iii.  Loans to ‘MSEs’ and Individuals:

a. Commercial banks (excluding small finance banks, regional rural banks and local area banks), Tier 4 primary (urban) co-operative banks, NBFC-upper layer entities and AIFIs are prohibited from levying pre-payment charges on all floating-rate loans granted to individuals or MSE for business purposes; and

b. Small finance banks, regional rural banks, Tier 3 primary (urban) co-operative banks, state and central co-operative banks and NBFC-middle layer entities are similarly prohibited where the sanctioned amount or limit does not exceed INR 5 million (approx. USD 60,000).

iv.   Other Categories: In cases outside the above exemptions, REs may impose pre-payment charges as per their board-approved policies, subject to certain limitations:

a. For term loans, pre-payment charges may be levied only on the amount actually pre-paid; and

b. For cash credit and overdraft facilities, pre-payment charges may be imposed only in respect of the sanctioned limit and only if the account is closed prior to the due date. No charges may be levied if the borrower gives prior notice of non-renewal of the facility and closes the account on the due date.

v.    No Retrospective Levies: Charges previously waived cannot be reinstated, thus preventing retrospective levies. No pre-payment charges may be imposed where repayment is initiated by the RE.