December 31, 2025: The Reserve Bank of India (RBI) has announced that borrowers of floating-rate home loans and other floating-rate loans will not be required to pay any prepayment or foreclosure charges from January 1, 2026. The decision is part of the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 and will apply to all floating-rate loans sanctioned or renewed on or after that date.
According to the RBI, the move follows supervisory reviews that found inconsistent practices among regulated entities (REs) in levying prepayment charges, leading to customer complaints and disputes. “Reserve Bank’s supervisory reviews have indicated divergent practices amongst Regulated Entities (REs) about levy of pre-payment charges in case of loans sanctioned to MSEs which lead to customer grievances and disputes,” the RBI said on July 2, 2025. It added that “certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service.”
Under the new rules, lenders will not be allowed to levy prepayment charges on floating-rate loans taken by individuals for non-business purposes, with or without co-obligants. For business-purpose loans availed by individuals and Micro and Small Enterprises (MSEs), commercial banks will also be barred from charging prepayment fees. However, certain institutions such as Small Finance Banks, Regional Rural Banks, Local Area Banks, Tier 4 Primary (Urban) Co-operative Banks, NBFC-ULs and All India Financial Institutions are excluded. No prepayment charges will be levied on loans of up to Rs 50 lakh by specified entities, including Small Finance Banks, Regional Rural Banks, select cooperative banks, and NBFC-MLs.
The RBI clarified that these directions apply regardless of whether the loan is prepaid partially or fully, the source of funds used, and without any minimum lock-in period. Borrowers will also not be charged if prepayment is initiated by the RE itself, nor can charges be applied retrospectively if they were earlier waived.
For fixed-term loans, the RBI said, “However, in case of term loans, pre-payment charges, if levied by the RE, shall be based on the amount being prepaid.” In cash credit or overdraft facilities, charges will not apply if borrowers notify lenders of non-renewal within the stipulated period and close the facility on the due date.
The RBI has directed that all rules related to prepayment charges must be clearly disclosed in sanction letters, loan agreements and the Key Facts Statement, and that lenders cannot impose charges not disclosed in the KFS.
