RBI New Circular on Pre-payment Charges on Loans 2025

 

A new circular on loan prepayment fees was issued by the Reserve Bank of India (RBI). If borrowers want to pay off their loans before the payback period, several Indian banks demand pre-payment fees. For instance, there will be pre-payment penalties if you take out a five-year auto loan and decide to pay it off in four.

In accordance with the October 9, 2024, Statement on Developmental and Regulatory Policies, a draft circular was released for public comment on February 21, 2025. The RBI has issued the updated circular after reviewing the supervisory findings and public comments on the draft circular.

All loans and advances approved or renewed on or after January 1, 2026, are subject to these directives. All commercial banks (with the exception of payments banks), cooperative banks, NBFCs, and All India Financial Institutions are subject to these directives.

Banks shall follow below Directions regarding levy of pre-payment charges

An RE is not allowed to collect pre-payment fees for any loans made to individuals, with or without co-obligants, for purposes other than business;

Regarding all business loans given to individuals and MSEs, whether or not there are co-obligants:

(a) No pre-payment fee shall be charged by a commercial bank (with the exception of Small Finance, Regional Rural, and Local Area banks), a Tier 4 Primary (Urban) Co-operative bank, an NBFC-UL, or an All India Financial Institution.

(b) No pre-payment fee may be assessed by a Small Finance bank, Regional Rural bank, Tier 3 Primary (Urban) Co-operative bank, State Cooperative bank, Central Cooperative bank, or NBFC-ML on loans up to Rs.50 lakh in sanctioned income.

But when it comes to term loans, any pre-payment fees that the RE may impose would depend on how much is being paid back.  Prepayment costs on cash credit/overdraft facilities that are closed before the due date will be assessed on an amount that does not exceed the authorized limit.

 As long as the facility is closed on the due date, there won't be any pre-payment fees for cash credit or overdraft facilities if the borrower notifies the bank that they intend not to renew the facility before the time frame specified in the loan agreement. Prepayment made at the bank's request will not result in any fees from the bank.

The loan agreement and sanction letter must explicitly state whether or not pre-payment charges are applicable. Additionally, if a Key Facts Statement (KFS) is required for loans and advances as outlined in the Reserve Bank's April 15, 2024, circular on "Key Facts Statement for Loans and Advances," it must also be included in the KFS. An RE is not permitted to collect pre-payment fees that have not been disclosed as outlined here.

When debts that the bank previously waived are repaid in full, the bank will not impose any fees or charges retroactively.

Download RBI Circular PDF

Read More

Public Sector Banks Surpass Private Banks in Loan Disbursals

In India, government banks have recovered significantly. Public sector banks (PSBs) have provided more loans than private banks for the first time in fifteen years. This represents a significant shift in the nation's banking industry. In the personal loan market, where government banks are currently lending more quickly than private banks, the expansion has been particularly robust. This change demonstrates how actively and competitively government banks are responding to consumer demands. For the first time in more than ten years, public sector banks have surpassed private banks in terms of overall loan distribution, making this accomplishment a significant turning point. Customers' increasing faith in government banks and their better performance in recent years are reflected in it.

Reason behind this

According to the Reserve Bank of India (RBI) and other financial reports, one of the main reasons of increase in loan disbursals of government banks is that private banks like HDFC Bank and Axis Bank have slowed down their lending. In recent years, private banks usually led in giving loans, but now they are lending less compared to public sector banks.

The fact that government banks are more active in managing loan programs started by the federal and state governments could be another factor. These include programs that give small workers and merchants financial support, such as the PM Vishwakarma Yojana and the PM Svanidhi Yojana. Public sector banks have supplied the majority of the loans under these schemes, with private banks participating in very little of them. This may be a major factor in the fact that public banks are currently lending more money than private ones.

How Much Have Public Sector Banks Grown?

By December 2024, public sector banks recorded a strong 17% growth in personal loan disbursals, while private banks managed only 10% growth in the same category. This clearly shows that public banks are stepping up and winning borrower trust in the retail loan space. Public sector banks aren’t just leading in personal loans—they’re also ahead in industrial and service sector loans.

• Industrial loans: Public banks provided 60% of the total ₹37.9 lakh crore
• Service sector loans: They contributed 56% of ₹49.9 lakh crore
• Personal loans: Public sector banks disbursed 52% of ₹51.1 lakh crore

This wide lead proves that PSBs are playing a much larger role in supporting India’s economy across sectors.

Credit Growth vs Deposits

Interestingly, for the fourth year in a row, banks have given out more loans than the money they have received through deposits.This kind of trend is very rare and has happened only two times in the last 50 years. Most of the money banks received as deposits came from Fixed Deposits (FDs), which made up 86% of the total increase in deposits. As of December 2024, half of all the money kept in banks is now in the form of term deposits like FDs.

Home Loans

Government banks are also doing very well in giving home loans, especially in smaller cities (Tier-3) and rural areas. In the financial year 2024–25, public sector banks gave out 46.4% of all home loans, up from 45.1% the year before.Meanwhile, private banks saw a small drop in their share of home loans—from 54.9% to 53.6%. During this period, public banks gave out ₹2.1 lakh crore in new home loans, which makes up 56.1% of all home loans given that year.

Non-Resident Indians (NRIs)

Deposits by Non-Resident Indians (NRIs) grew well in the financial year 2024–25. Their total deposits increased by 10%, reaching ₹14.16 lakh crore by March 2025. About half of these deposits are in fixed deposits (FDs), which shows that NRIs still have strong trust in India’s public banks for saving their money for the long term.

Read More

FBOIOA launches ‘Sahayya’ scheme to provide interest-free financial assistance to officers

 

A unique relief program called "FBOIOA Sahayya" has been launched by the Federation of Bank of India Officers' Associations (FBOIOA) to provide interest-free financial aid to officers who have had their salaries drastically reduced as a result of perquisite tax deductions. The program's goal is to give officers who had significant tax deductions in February 2025 and whose net salary was less than Rs.20,000 instant financial support.

Public sector banks have recently started taxing the perks that officers are provided. Benefits offered to bank employees include low-interest loans. For instance, the average person's car loan interest rate is 9%. Bank employees receive a 5.5% loan rate.

Because bank employees pay low interest rates, they can save money on loans, which is considered advantageous. Bank workers are now required to pay taxes on this perquisite. This indicates that tax will be paid on the amount that differs because of the different interest rates. If the general public pays Rs. 1000 in interest on a car loan while bank employees pay Rs. 700, the bank employees must pay tax on the Rs. 300 difference.

Financial distress resulted from the Bank of India's officers receiving drastically reduced or no pay in February 2025. Nearly 1,400 officers reportedly have net salary credits of less than Rs. 20,000 as a result of high tax deductions applied by the bank.

In response, the FBOIOA has been negotiating with bank management to find a long-term solution. However, to offer immediate relief, the federation has launched this interest-free advance scheme for affected officers.

Who is eligible for the scheme?

To apply for financial assistance under the Sahayya scheme, an officer must meet the following criteria:

* Must be an active FBOIOA member.

* Net salary for February 2025 should be below Rs.20,000, primarily due to perquisite tax deductions.

* Application process and required documents

* Eligible officers need to submit an application form (Annexure-1) through their Unit General Secretary along with the following documents:

1. A copy of the February 2025 salary slip showing a net salary below Rs.20,000.

2. Five post-dated cheques (PDCs) of Rs.10,000 each, drawn in favor of the respective unit.

Deadline for application submission: March 7, 2025.

Disbursement and repayment of financial assistance

Under the FBOIOA Sahayya scheme, officers will receive ₹50,000 as an interest-free financial advance, which will be disbursed in two equal installments:

Rs.25,000 as the first installment upon approval of the application.

Rs.25,000 as the second installment in the following month.

The repayment will begin from May 2025, with officers required to repay the total amount in five equal monthly installments of Rs.10,000 each.

Federation’s commitment to officer welfare

The FBOIOA has assured officers that discussions with bank management are ongoing to prevent such financial distress in the future. While the Sahayya scheme serves as a short-term relief measure, the federation remains committed to finding a long-term solution for perquisite tax deductions affecting officers’ salaries.

Officers facing financial difficulties are encouraged to apply for the scheme before March 7, 2025, to avail of this support.

Read More

PSU banks increase their market share and surpass private lenders in loan growth

 

According to a report by Mint, India's public sector banks have surpassed their private sector counterparts in terms of lending growth, reclaiming some of the market share they had lost during the previous few years. In December, the loan book of public sector banks increased by 12.4% year over year, while that of private banks increased by 10.5%. As of December 31, 53.5 percent of all loans were disbursed by state-run banks. The report, which referenced RBI data, stated that this is greater than their market share of 53.2% at the end of the September quarter. According to the survey, private lenders' market share fell from 41.8 percent in September to 41.5 percent in December.

Following years of decline, PSU banks' market share has somewhat increased. In June 2017, its market share was 66.7 percent; by June 2024, it had fallen to 53.1 percent. According to the research, this might have been exacerbated by its deteriorating asset quality and capital worries. 

 Public sector banks performed well in the first three quarters of the current fiscal year, according to the finance ministry on February 6. Their April-December net profit of Rs 1.29 lakh crore represented a 31.3 percent increase over the same period last year. With the net NPA ratio at 0.59 percent, the ministry also reported an improvement in asset quality.

According to the ministry, PSBs are well-capitalized and positioned to satisfy the credit needs of all economic sectors, with a focus on the infrastructure, MSME, and agricultural sectors. 

 Improved systems and procedures for credit discipline, the identification and resolution of stressed assets, responsible lending, better governance, financial inclusion programs, and technology adoption are just a few of the outcomes of policy and procedural changes. 

 These actions resulted in the banking industry's overall stability and long-term financial health, which is seen in the PSBs' current performance.

Read More

A Loan Defaulter Mistreats BOI Staff and Attempts to Hostage Them

After being asked to pay his loan payment, a loan account holder stormed into a bank branch, misbehaved, and attempted to take the employees hostage. 

The event happened inside the Bank of India in Varanasi's Badi Bazar, and Shiv Pratap Singh Chandel, the accused, has been charged at the Chetganj police station. Branch manager Jitendra Kumar Dubey claims that Shiv Pratap Singh Chandel was contacted by bank employees to inform him of his overdue loan payment. 

Rather than reacting appropriately, he made a phone threat to murder the bank employees. Shiv Pratap Singh Chandel forcibly entered the bank's branch on February 15 at night when audit work was underway. Important bank paperwork were tampered with by him as he attempted to hold the staff and officers hostage. He also misbehaved with the bank employees and threatened them.

He misbehaved with female staff as well and issued death threats. The Chetganj police station in-charge confirmed that a case has been registered, and an investigation is underway. Further legal action will be taken based on the findings.

Read More

This Public Sector Bank was top lender to state-backed corporations and PSUs in FY23

Public Sector Banks (PSBs) lent ₹4.12 trillion to state-backed corporations and public sector undertakings during 2022-23, down from ₹4.93 trillion during the previous year, finance minister Nirmala Sitharaman informed Parliament in a written response on Monday.

Responding to questions by member of parliament, Velusamy P, Sitharaman informed the Lok Sabha that Canara Bank led the lending during 2022-23 to government backed entities at ₹187,813 crore during the recently concluded fiscal year, followed by Punjab National Bank ( ₹70,142.5 crore), State Bank of India ( ₹66,523.2 crore), Bank of India ( ₹25,147 crore), Bank of Baroda ( ₹15,706.8 crore), Union Bank of India ( ₹12,584.8 crore), Bank of Maharashtra ( ₹10,822.7 crore), Indian Bank ( ₹9,021 crore), Indian Overseas Bank ( ₹7,490 crore), Central Bank of India ( ₹3,949 crore), UCO Bank ( ₹2,939.4 crore), Punjab and Sind Bank ( ₹87.7 crore).

Meanwhile, the finance minister informed the Lok Sabha that public sector banks (PSBs) will have to take steps to adopt a focused approach on ease of service delivery and customer protection, follow regulatory norms, adopt robust risk management practices, focus on increasing rural, agriculture and sectoral credit to meet the Priority Sector Lending targets.

In  a meeting held between the top PSB bank executives and top finance ministry officials, including the finance minister, on 6 July, it was decided that the sponsor banks of the Regional Rural Banks (RRBs) will take steps for technological upgradation of the RRBs to make them more efficient, Sitharaman said in a written reply.

“Performance under PM SVANidhi scheme, which was started to support COVID affected street vendors to restart their businesses, was noted, wherein 50.57 lakh loans have been disbursed, amounting to ₹6,482 crore, to 38.5 lakh street vendors as on 20.7.2023," she said.

Financial performance of PSBs was also noted which showed that all the major financial parameters have significantly improved, she said.

The PSBs have posted record aggregate net profit of ₹1.04 trillion in FY2022-23, she added.

Meanwhile, Sitharaman also informed parliament that The National Asset Reconstruction Company Ltd (NARCL) has as of 17 July acquired three borrower entities -- Jaypee Infratech Ltd, SSA International Ltd, Helios Photo Voltaic Ltd-- with an aggregate debt exposure of ₹21,349 crore.

“NARCL has further informed that these assets have been acquired only in the fourth quarter of the financial year (FY) 2022-23, and no recovery has been made in these accounts as of 17.7.2023," she said.

“Further, in respect of one more account, i.e. SPML Infra Ltd, letter of approval for debt acquisition of ₹1,994.90 crore has been issued by the lenders, and in-principal approval for the government guarantee has also been issued," she added.

Sitharaman further added that comprehensive measures have been taken by the government and the Reserve Bank of India (RBI) to recover the bad debts, due to which scheduled commercial banks have recovered a total amount of ₹ 7.16 trillion (provisional data for FY 2022-23) during the last five financial years.

Read More

10 banks offering lowest home loan interest rates

Home loan interest rates vary and depend on a variety of factors; this is critical since even minor changes in loan interest rates can have a significant impact on borrowers. Changes in the lending rate, which the RBI regulates, may have an influence on home loan EMIs in particular.

The RBI implemented the Base Lending Rate (BLR) system in 2010, and subsequently transitioned to the Marginal Cost of Funds-Based Lending Rate (MCLR) scheme in 2016. It has now implemented the Repo Linked Lending Rate, or RLLR, since October 2019.

Loans that are liked to the RLLR change depending on the repo rates announced by the Reserve Bank of India. Here are banks offering the lowest interest rates on home loans and note that rate may vary depending on the loan amount, credit score amongst other factors.

Cheapest home loan interest rates

MISSING: summary MISSING: current-rows.

Indian Bank	9.20	8.45%	9.1%
HDFC Bank	--	8.45%	9.85%
Indusind Bank	--	8.5%	9.75%
Punjab National Bank	9.25	8.6%	9.45%
Bank of Maharashtra	9.30	8.6%	10.3%
Bank of Baroda	9.15	8.6%	10.5%
Bank of India	9.25	8.65%	10.6%
Karnataka Bank	--	8.75%	10.43%
Union Bank of India	9.30	8.75%	10.5%
Kotak Mahindra Bank	--	8.85%	9.35%

Interest rates as on June 1, 2023

Transferring your debt to a lender offering low home loan interest rates may be a good solution if you are finding it tough to pay your mortgage due to rising interest rates. However, one should weigh the benefits and drawbacks and determine the extra savings that come from selecting a house loan balance transfer.

As you may be aware, a home loan has additional costs in addition to interest, such as processing fees, stamp duties, legal fees, valuation fees, and other transfer-related technical fees. So, when considering transferring your house loan balance, be sure the advantages exceed the disadvantages.

When to switch or transfer your old regime loan

If you find that your interest rate is significantly higher than the current one offered under EBLR after comparing it to the rates of new borrowers from the same lender, it can be advantageous for you to convert to the new regime by paying the necessary minimal costs. Transferring your loan to a new lender is preferable if your current lender does not provide this benefit or if competing lenders are providing rates that are significantly cheaper.

Read More

Moratorium extension of 3 months by RBI has two sides; the second one is ugly for banks

Governor Das had announced a three-month moratorium for all term loan repayments between March 1 and May 31 at his last address in April.

The loan moratorium will be extended till August 31, says RBI governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.

"The surprise move by the RBI to reduce repo rate to 4 percent from 4.4 percent followed by an extension of the loan moratorium by another three months is a welcome step and can provide solace to the ailing economy whereby EMI burden for the borrowers would be somewhat lowered and would also allow them to defer EMI payments by another three months. For corporate borrowers too, the increase in group exposure limit of banks to 30 percent from 25 percent will bring some relief," said Rajesh Agarwal, Head of Research at Aum Capital.

"The fall in bold yield after the announcement is positive news, the committee's decision to continue with its accommodative stance is further good news but the point remains that even after so much of liquidity, the banks are reluctant to take additional risk and that has resulted in a muted credit growth," he added.

"RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models," said VK Vijayakumar- Chief Investment Strategist at Geojit Financial Services.

"Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue," he added.

For banks, the extension of moratorium by another three months has two sides. A clear picture on the asset quality of the lenders will now emerge only by March 2021, instead of September 2020. There is a risk of the moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. And for MFIs and NBFCs catering to the bottom-of-the-pyramid customers, the risk of repayment behaviour getting disturbed is higher.

On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31 diminishes, and therefore the NPL spike for lenders could be lower than what is anticipated now.

The moratorium extension also gives time to lenders to strengthen their collection infrastructure for retail products as restrictions on physical collection/follow-up eases out and collection agencies would have had their migrant workforce back.

For working capital facilities, interest payment has been deferred by another three months, in line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.

While the RBI governor Shaktikanta Das announced that the three-month term loan moratorium has been extended till August 31, it is to be noted that individual banks have the right to take a decision on whether this will be allowed for all borrowers. It is only an enabling provision and not a mandate.

Read More