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In a major relief for borrowers, the Reserve Bank of India (RBI) has announced that banks and other regulated lenders will no longer be allowed to impose pre-payment charges on loans taken by individuals for purposes other than business.
The RBI observed that some lenders were using restrictive clauses in loan contracts to discourage borrowers from switching to other lenders offering better interest rates or services. As per the new guidelines released on Wednesday, these directions will come into force for all loans and advances sanctioned or renewed on or after January 1, 2026. This rule applies whether the loan has a co-obligant or not. The RBI has clarified that, no pre-payment charges will be levied on floating rate loans taken by individuals for non-business purposes. The new rule will be applicable to all commercial banks (excluding payment banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions. The central bank also added that this holds true irrespective of whether the loan is being repaid in full or in part and regardless of the source of funds used for the repayment. RBI stated that there is no minimum lock-in period for availing this benefit. Even in the case of dual or special rate loans (a mix of fixed and floating rates), if the loan is on a floating rate at the time of repayment, the no-charge rule applies. As per the banking regulator directive, issued under the "Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025," aims to standardize lending practices and reduce customer grievances that have arisen due to inconsistent policies among financial institutions. RBI said "in exercise of the powers conferred by Sections 21, 35A and 56 of the Banking Regulation Act, 1949, Sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934 and Section 30A of the National Housing Bank Act, 1987, hereby issues the Directions". The RBI has further stated that pre-payment charges, if any, in cases not covered under these rules, must be clearly mentioned in the loan sanction letter and loan agreement. If a Key Facts Statement (KFS) is applicable, these charges must also be disclosed there. No undisclosed or retrospective charges will be allowed. Additionally, no charges will be levied if the pre-payment is initiated by the lender itself. This move is expected to empower borrowers with greater flexibility and improve transparency in loan agreements. It also repeals several earlier circulars on foreclosure and pre-payment charges, consolidating the guidance under one comprehensive direction. (ANI)
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