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.
