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

Reserve Bank of India (RBI) has prohibited banks and other regulated lenders from charging pre-payment penalties on floating rate loans availed by individuals for non-business purposes. The new norm, namely Pre-payment Charges on Loans Directions, 2025, will be effective from next year. It is aimed at boosting transparency and borrower flexibility. The directive will apply to commercial banks, excluding payment banks, co-operative banks, NBFCs, and All India Financial Institutions. The exemption applies regardless of whether the loan is repaid fully or partially, the source of funds, or the presence of co-obligants. It also includes dual and special rate loans if they are on a floating rate at the time of repayment. No minimum lock-in period is required. The loans not covered under this rule, lenders must disclose any pre-payment charges in the sanction letter, loan agreement, and Key Facts Statement. Some lenders were using restrictive clauses to prevent customers from switching to better loan terms, and the new rules aim to curb such practices and strengthen consumer protection.