RBI bars pre-payment charges on transfer of floating rate loans for individual borrowers

In a move aimed at enhancing transparency and borrower flexibility, the Reserve Bank of India (RBI) has introduced a new regulation that prohibits pre-payment penalties on certain types of loans. Effective from 2025, the new rule—titled Pre-payment Charges on Loans Directions, 2025—bars banks and other regulated lenders from levying pre-payment charges on floating rate loans taken by individual borrowers for non-business purposes.

A floating rate loan is a type of loan where the interest rate fluctuates over time based on a benchmark, unlike a fixed-rate loan where the rate remains constant. The prohibition on pre-payment charges applies regardless of whether the repayment is full or partial, the source of repayment funds, or even if co-obligants (co-borrowers or guarantors) are involved.

Importantly, this rule covers not just traditional floating rate loans but also dual rate and special rate loans, provided they are operating under a floating rate structure at the time of repayment. No minimum lock-in period—a predefined duration during which a borrower cannot repay a loan—is required under this directive.

The regulation applies to commercial banks (excluding payment banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions (AIFIs). Payment banks are a type of bank in India that can accept deposits but cannot issue loans or credit cards, and hence are excluded from this directive.

For loans not covered under this rule, lenders are required to clearly disclose any applicable pre-payment charges in the sanction letter, loan agreement, and the Key Facts Statement (KFS)—a document summarizing the essential terms and conditions of the loan to aid informed decision-making by the borrower.

This move is part of the RBI's broader effort to curb restrictive practices by lenders, who have, in the past, included restrictive clauses that prevented customers from switching to better loan terms offered by competitors. By eliminating such barriers, the RBI aims to strengthen consumer protection and encourage healthy competition in the lending market.

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