[Analysis] RBI Issues New Guidelines on Pre-payment Charges for Loans | Effective from Jan 2026

RBI Issues New Guidelines on Pre-payment Charges for Loans under the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025, to curb unfair lending practices and promote borrower-friendly credit norms. These guidelines aim to protect individual borrowers and Micro and Small Enterprises (MSEs) from arbitrary pre-payment penalties that previously discouraged early loan closure or switching to better lenders. The directions prohibit regulated entities from imposing pre-payment charges on floating-rate loans for non-business purposes and on business loans up to ₹50 lakh, depending on the category of the lender.

Table of Contents

1. Introduction
2. Key Directions on Pre-payment Charges
3. Other Situations and Exceptions
4. Disclosure Requirements
5. Charges Once Waived Cannot Be Revived
6. Effective Date and Applicability
7. Conclusion

1. Introduction

RBI found that many lenders were following different and unfair practices when it came to charging pre-payment fees on loans given to MSEs. This caused confusion, complaints, and even disputes. Some lenders were also adding tricky terms in loan agreements to stop borrowers from switching to other banks offering better rates or services. To fix these issues and make the system fair for borrowers, RBI introduced Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025’.

These guidelines aim to ensure that Micro and Small Enterprises (MSEs) get easy and affordable credit and are not held back by unfair loan terms that prevent them from choosing better lenders.

2. Key Directions on Pre-payment Charges

The RBI has laid down specific rules based on the type of borrower, purpose of the loan, and category of the lender, as outlined below:

2.1 Loans Not for Business Purposes

For individual borrowers (with or without co-obligants) who have taken floating rate loans for non-business purposes, no pre-payment charges shall be levied by the Regulated Entities.

Example – If Mr A takes a floating rate personal loan from a bank to renovate his home—say, to upgrade the kitchen, paint the interiors, and fix plumbing issues—he decides to repay the entire loan within a year using his savings. In this case, the lender cannot impose any pre-payment penalty or charge for settling the loan before the agreed tenure, as the loan was taken for a non-business purpose.

2.2 Loans for Business Purposes to Individuals and MSEs

For loans taken by individuals or Micro and Small Enterprises (MSEs) for business purposes, the applicability of pre-payment charges depends on the category of the lender:

2.2.1 No Pre-payment Charges Regardless of Loan Amount

Regulated Entities such as commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks), Tier 4 Primary Urban Co-operative Banks, NBFCs-Upper Layer (NBFC-UL), and All India Financial Institutions are not permitted to levy pre-payment charges on such loans, irrespective of the loan amount.

2.2.2 No Pre-payment Charges for Loans up to ₹50 Lakh

In the case of Small Finance Banks (SFBs), Regional Rural Banks (RRBs), Tier 3 Primary Urban Co-operative Banks, State and Central Co-operative Banks, and NBFCs-Middle Layer (NBFC-ML), pre-payment charges cannot be imposed if the loan amount is up to ₹50 lakh. Loans exceeding ₹50 lakh may still attract pre-payment charges as per the lender’s policy.

Example – A Micro and Small Enterprise (MSE) takes a ₹40 lakh business loan from a Small Finance Bank to purchase new machinery and expand production capacity. If the borrower decides to repay the entire loan after two years using profits or other funding, the Small Finance Bank cannot impose any pre-payment charges, since the loan amount is within the ₹50 lakh limit and is covered by the no-charge provision.

2.3 Other Key Conditions

These directions apply irrespective of the source of funds used for pre-payment (e.g., from savings, another loan, inheritance). Further, no minimum lock-in period is required before making a pre-payment.

For dual/special rate loans (combination of fixed and floating rate), pre-payment rules will apply only if the loan is in its floating rate phase at the time of pre-payment.

3. Other Situations and Exceptions

Apart from the general provisions, RBI has specified how pre-payment charges should be handled in certain special cases, as explained below:

3.1 Loans Not Covered Under Above Clauses

For loans other than those mentioned above:

1. Pre-payment charges may be levied as per the RE’s approved policy.
2. In case of term loans, any charges must be based on the amount being prepaid.
3. 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.

3.2 No Charges If Borrower Gives Due Notice

For cash credit or overdraft facilities, no pre-payment charges will apply if the borrower informs the lender in advance (as per the loan agreement) that they do not wish to renew the facility, and the account is closed on the due date.

3.3 No Charges if Pre-payment Initiated by the RE

If the Regulated Entities itself initiates the closure or pre-payment (e.g., under restructuring), no charges can be levied.

4. Disclosure Requirements

To promote transparency, Regulated Entities (REs) are required to clearly disclose the applicability or exemption of pre-payment charges in the sanction letters, loan agreements, and the Key Facts Statement (KFS), wherever applicable. Additionally, no hidden or undisclosed charges shall be levied at the time of pre-payment.

5. Charges Once Waived Cannot Be Revived

If the RE has earlier waived certain charges/fees, they cannot be imposed retrospectively at the time of pre-payment.

6. Effective Date and Applicability

The guidelines will come into effect for all loans that are sanctioned or renewed on or after January 1, 2026. These directions are applicable to all commercial banks (excluding payment banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions.

7. Conclusion

The RBI’s Directions on pre-payment charges aim to bring greater fairness and consistency in loan practices. For a long time, borrowers—particularly Micro and Small Enterprises (MSEs)—have faced difficulties in switching lenders due to pre-payment penalties and restrictive terms in loan agreements.

By removing arbitrary charges and limiting such contract conditions, these directions improve borrower flexibility and promote transparency. They make it easier for borrowers to explore better loan terms, refinance when needed, and manage credit more efficiently.