RBI Prepayment Charges Guidelines 2025: What Indian Lenders Must Know

Introduction

The Reserve Bank of India (RBI) has issued the Prepayment Charges on Loans Directions, 2025 on July 2, 2025. These will come into effect for all loans sanctioned or renewed on or after January 1, 2026. The objective is to standardise the levy of prepayment or foreclosure charges on loans and advances across banks and NBFCs in India.

Applicability

These directions apply to Commercial Banks (but excluding Payments Banks), all Non-Banking Financial Companies (NBFCs) (including Middle Layer and Upper Layer NBFCs), Cooperative Banks (including Urban and Rural) and All India Financial Institutions (AIFIs).

These guidelines apply irrespective of the source of funds used for prepayment (borrower's own funds or takeover by another lender).

Key Highlights of the Guidelines

1. Zero Prepayment Charges for Retail Borrowers

   For loans not intended for business purposes (such as personal loans, car loans, education loans, etc.) availed by individual borrowers, no prepayment charges can be levied—whether or not there is a co-borrower.

   
   

2. Business Loans: Differential Impact on Lenders

   For business loans availed by individuals or MSMEs:

   • No prepayment penalty can be charged if the lender is:

     • A commercial bank (excluding Small Finance Banks, RRBs, LABs)

     • A Tier 4 Primary Urban Co-operative Bank

     • An upper-layer NBFC

     • An All India Financial Institution

   For other institutions—such as Small Finance Banks, RRBs, and NBFC-MLs:

   • No foreclosure charges are permitted on loans up to INR 50 lakh sanctioned for business purposes..

   
   

3. Commercial Implications for Lenders 

   These guidelines may lead to:

   • Reduced fee income from prepayment penalties. RBI is clear on its stance that charges and fees cannot be a mode of primary income specially in micro finance, personal loans and small ticket consumer loans.

   • Increased loan refinancing and balance transfers, particularly for MSMEs and retail borrowers.

   • Greater pricing discipline—lenders may need to reconsider how they structure interest margins and lock-in mechanisms.

   • Pressure on borrower retention, especially for NBFCs and small finance banks, as switching costs for borrowers go down.

   Lenders should revisit their loan pricing strategies, prepayment policies, and borrower engagement models in light of the Directions.

   
   

4. Mandatory Disclosures and Compliance Requirements

   All Regulated Entities (REs) must:

   • Clearly disclose prepayment terms (if applicable) in the loan agreement, sanction letter, and Key Fact Statement (for digital lending).

   • Ensure no retrospective charges are levied.

   • Not charge prepayment fees when the closure is initiated by the lender itself.

   • Align internal policies with the RBI-approved prepayment charge policy for cases where charges are still permitted.

   
   

5. Next Steps for Banks and NBFCs

   To ensure compliance and commercial viability:

   • Review existing loan documentation and digital lending interfaces.

   • Update internal SOPs and training modules for sales and legal teams.

   • Revise prepayment and foreclosure policies for new loans.

   • Monitor portfolio-level impact on early closures and refinancing trends.

   
   

Conclusion

The RBI's 2025 Directions signal a clear shift towards borrower-friendly practices and enhanced transparency. While this may curb income from loan prepayment charges, it presents an opportunity for NBFCs and banks in India to differentiate themselves on borrower experience, competitive pricing, and digital loan servicing.

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

For further queries or details, you may contact:

Mr Anuroop Omkar

Partner, AK & Partners

info@akandpartners.in