FAQs on Pre-Payment Charges
-Team Finserv | finserv@vinodkothari.com
Pre-payment means paying a loan before its scheduled due date or end date. Borrowers may choose to pre-pay when they have extra cash or find better loan terms from another lender. While this may help the borrowers reduce their overall interest cost or improve their loan terms, lenders have traditionally charged a fee for such early repayment. These pre-payment charges are meant to cover the lender’s loss of expected stream income. So, from the lender’s perspective, pre-payment charges help make up for this loss. However, from the borrower’s perspective, such charges can be unfair especially on floating-rate loans, where the lender has a right to revise the interest rate at periodic intervals based on market conditions. Floating-rate loans already give lenders the ability to revise rates charging a penalty for early repayment adds another burden for the borrower.
The regulatory stance on prepayment charges has evolved over time, beginning with a prohibition on such charges in case of floating rate home loans, followed by an extension to cover personal loans and now, to include even business loans extended to MSEs and individual borrowers. [Evolution of this regulatory bar is discussed in the later part of the present FAQs]
The present extension of the regulatory bar on levy of prepayment charges in case of floating rate business loans extended to MSE and individual borrowers, stems from the RBI supervisory reviews. The reviews conducted by RBI indicated divergent practices amongst the regulated entities with regard to levy of pre-payment charges in case of loans sanctioned to MSEs which lead to customer grievances and disputes. Further, certain REs were 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.
To address this, RBI in October 2024 in the Statement on Developmental and Regulatory Policies, proposed that the ambit of prohibition on levy of pre-payment charges on floating rate loans extended to individuals be expanded to also include MSE borrowers. Accordingly, a draft circular was released on February 21, 2025. Based on the comments received and supervisory findings, the final Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 have been issued on July 2, 2025 (‘Prepayment Directions’), effective from January 01, 2026.
The Prepayment Directions consolidate the diverse practices and provisions on levy of prepayment charges for all lenders. This would ensure uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs (including HFCs).[1]
We have analyzed and collated questions on the various nuances and impact of the Prepayment Directions for better understanding in the form of FAQs as listed hereinafter:
A.… Applicability and Conceptual Understanding:
1…. What is the regulatory regime for prepayments/prepayment charges?
2…. Who all are covered under the Prepayment Directions?
3…. What will be the applicability of the Prepayment Directions in case of the following products:
4…. When do these Directions come into force?
7…. Whether the provisions of Prepayment Directions are applicable to demand and call loans as well?
8…. Does the provision apply only in case of part pre-payment or foreclosure as well?
9…. What is the difference between a fixed rate and floating rate interest loan?
B.… Regulatory requirements in case of floating rate loan:
23.. Whether the limit of ₹50 lakh also applies in case of floating rate loan disbursed by a HFC?
24.. What is the applicability of the Prepayment Directions in case of NBFC-BL?
C.… Regulatory requirements in case of fixed rate loans:
28.. Can prepayment charges be levied on fixed rate housing loans disbursed by an HFC?
D.… Prepayment Charges and Conversion Treatment for CC and OD facilities:
29.. How are cash credit/ overdraft facilities treated for levying pre-payment charges?
30.. How are conversions from OD/CC to term loans treated?
E.… Restrictions on Prepayment:
32.. Will lock-in period be allowed in case of hybrid ROI loans?
35.. Can an RE levy prepayment charge, if the same is effected at its own instance?
36.. What is the meaning of “pre-payment is effected at the instance of the RE”?
F.… Co-lending and Digital Lending:
39.. What are the disclosure requirements under the Prepayment Directions?
40.. How should the disclosure be given in KFS?
42.. Can REs implement a slab-based charge to be levied based on prepaid percentage?
43.. How will consortium or syndicated loans be handled?
A. Applicability and Conceptual Understanding:
1. What is the regulatory regime for prepayments/prepayment charges?
Pre and post January 01, 2026 i.e., the date from which the Prepayment Directions will become applicable, the regulatory regime for levy of prepayment charges is captured below:
| Type of NBFC | Up to December 31, 2025 | From January 01, 2026 |
| NBFCs (Other than HFCs) | Para 45.7.4 of the SBR Master Directions;Board approved policy on levy of prepayment charges. | Prepayment Directions;Board approved policy on levy of prepayment changes. |
| HFCs | Para 85.6 and 85.7 of the HFC Master Directions;Board approved policy. | Para 85.6 of the HFC Master Directions;Prepayment Directions;Board approved policy on levy of prepayment changes. |
2. Who all are covered under the Prepayment Directions?
These Directions shall apply to all commercial banks (excluding payments banks), cooperative banks, NBFCs (including HFCs) and All India Financial Institutions.
3. What will be the applicability of the Prepayment Directions in case of the following products:
- Revolving lines of credit
- Working capital facilities
- Loans to companies
- Financial leases
- Discounting of commercial invoices/ bills of exchange
The applicability of the Prepayment Directions in case of the above listed products shall be as follows:
| Type of product | Applicability |
| Revolving lines of credit | A revolving line of credit is a type of loan arrangement that provides borrowers with access to a predetermined amount of funds, which they can borrow, repay, and borrow again as needed. Therefore, there is no question of levy of prepayment charges during the facility period. However, with respect to a situation wherein the borrower does not opt to renew the facility, the applicability will be as provided in para 7 of Prepayment Directions. For detailed discussion, see response. See also, our article on revolving lines of credit. |
| Working capital facilities | Working capital facilities are generally in the nature of term loans. Accordingly, covered by the Prepayment Directions. As regards the question of levy of prepayment charges, see conditions in (3) below. |
| Loan to companies | In case of term loans extended to companies, the applicability will be checked basis the following: Is the borrower an MSE?Is the facility a floating rate loan?Is the lender an RE? If answers to all the above questions are positive, Prepayment Directions will be applicable. Next, with respect to whether prepayment charges can be levied, the same shall depend on who the lender is. That is to say, NBFC-UL and Banks cannot levy prepayment charges on the floating rate business loans to MSEs. In case of NBFC-ML, there is a limit of ₹50 lakh up to which the same cannot be levied. NBFC-BLs shall be guided by their respective board approved policy. |
| Financial lease | Financial lease by its very nature, are akin to loans. The lease rentals received by the lessor is divided in two parts, the interest component and the principal. However, given that the lease rentals are fixed at the time of entering into the agreement, and the interest is on a fixed rate basis, to that extent, in our view, any prepayment should be guided by the board approved policy. |
| Discounting of commercial invoices/bills of exchange | The question in case of bills discounting could be what if after the lender has discounted the bill, the borrower prepays the loan amount. In this scenario, can the borrower ask the discounting agency to repay the discounting charges proportionately? Here it is to be noted that prepayments are contingent in nature. At the time when the bill was discounted, none of the parties were certain about it. Accordingly, in our view, there should not be a question of asking the discounting agency to repay the discounting charges. |
4. When do these Directions come into force?
These apply to all loans and advances sanctioned or renewed on or after January 1, 2026. Any loans sanctioned before the said date shall not be covered (for compliances with respect to such loans, you may refer to our resource here).
5. If a loan is sanctioned/renewed before January 1, 2026 but disbursed thereafter, which norm shall apply?
The Prepayment Directions apply based on the sanction date. A loan sanctioned before January 1, 2026 is outside the scope, even if disbursed later. Conversely, any loan sanctioned on or after January 1, 2026 falls within scope.
6. Does a top-up loan or loan enhancement sanctioned after January 1, 2026 fall within the scope of the Prepayment Directions?
Yes. Any fresh sanction or renewal on or after the effective date must comply with the pre-payment charge norms.
7. Whether the provisions of Prepayment Directions are applicable to demand and call loans as well?
Footnote 2 of the Prepayment Directions clarifies that the term ‘loans’ shall include term loans as well as demand loans. However, in the context of demand and call loans, it is to be noted it could be of two types, (i) simple demand loan and (ii) demand and call loans. In case of plain vanilla demand loans, the lender can ask the borrower to pay back at any point of time. Since such payment would be at the instance of the lender, the same should not be considered for levy of any prepayment charges. But in case of demand and call loans, the borrower also carries a right to prepay. Therefore, in case of demand and call loans, there cannot be a question of levy of prepayment charges.
8. Does the provision apply only in case of part pre-payment or foreclosure as well?
The distinguishing factor between pre-payment and foreclosure is that the former means early payment of scheduled installments, while the latter implies early payment of the entire outstanding amount leading to early closure of the loan term. The Prepayment Directions apply equally to part prepayments and foreclosure (full prepayments). Para 5(iii) of the Prepayment Directions makes it clear that the exemptions in paras 5(i) and 5(ii) apply “irrespective of the source of funds used for pre-payment of loans, either in part or in full, and without any minimum lock-in period”. Likewise, for facilities outside those blanket exemptions, any prepayment charge on a term loan must be “based on the amount being prepaid” (whether that is a tranche or the entire balance), and for CC/OD closures, charges (if any) are capped at the sanctioned limit on closure before the due date Hence, going by the intent of the regulator, the provisions should apply on both partial as well as full prepayment by the borrower and hence, covering both prepayment charges as well as foreclosure charges.
9. What is the difference between a fixed rate and floating rate interest loan?
A fixed rate loan refers to one where interest rates remain locked throughout the loan tenure, while a floating rate term loan refers to interest rates that are subject to resets with reference to a benchmark rate or reference rate. Usually, the floating rate has a fixed spread over the said reference rate. Reference rate is determined by taking into account the cost of funds, credit cost, liquidity cost, operating expenses, expected return on equity, etc. Lenders have the option to change the reference rate prospectively depending on changes in the input factors.
What would one say where the loan has a fixed rate, and the lender has the option to change the rate during the loan tenure, say, with the concurrence of the borrower? This is still a fixed rate loan. A floating rate facility is one with a fixed spread over a benchmark rate.
In floating rate too, variations of interest rate happen only on “reset dates” or reset periods; therefore, between the reset dates, the interest rate still remains fixed.
10. Whether the provisions are also applicable to dual/special rate (combination of fixed and floating rate) rate loans?
In case of dual rate or special rate i.e., a combination of fixed and floating, the Prepayment Directions will be applicable if the loan is on floating rate at the time of prepayment. Prepayment at the time when the loan is on fixed rate shall be governed by the board approved policy of the lender. Note for HFCs, the extant HFC Directions also prohibit charging prepayment charges on fixed rate housing loans foreclosed with own sources (refer response here).
11. If a loan moves from fixed to floating rate during the tenure of the loan, then at the time of prepayment, what are the rules which shall apply with regards to prepayment charges?
Refer response above, the status on the actual pre-payment date determines the levy of prepayment charges. If the loan is on a floating rate at the point of prepayment, the floating rate pre-payment norms shall apply, regardless of the loan being at fixed rate earlier.
12. In case the sanctioned amount was ₹100, amount outstanding is ₹80 and the customer prepays ₹50. In this case, the prepayment charges, if leviable is to be levied on which amount?
The rationale behind levy of prepayment charge is to deter the customers from prepaying the loan amount which if paid before the due date shall result in revenue loss to the lender. Therefore, the prepayment charges, if leviable, must be levied on the amount prepaid i.e., ₹50 in the present case.
13. What will be the applicability of the Prepayment Direction in case where at time of sanction of loan amounting to ≤ ₹50 lakh to an individual/MSE, the lender was an NBFC-BL, however, at the time of pre-payment, its classification changed to NBFC-ML?
The exemption from prepayment charges on floating rate business loans upto ₹50 lakh applies only when the lender at the time of sanction is in one of the categories listed in para 5(ii)(b) of the Prepayment Directions, namely, SFB, RRB, Tier-3 Primary (Urban) Co-operative Bank, State/ Central Co-operative Bank or an NBFC-ML.
In the given scenario, the borrower’s floating rate business loan of ≤ ₹50 lakh was sanctioned by an NBFC-BL. NBFC-BLs are not included in para 5(ii)(b), so no automatic exemption applied at sanction. Even though the same financial entity has been reclassified as an NBFC-ML, this post sanction change does not impact the exemption provided at the time of sanction. The loan continues to be governed by the governing regime and fee disclosures that were in place on the sanction date.
Therefore, just because the loan was originally sanctioned by an NBFC-BL, it was never covered by the ₹50 lakh cap under para 5(ii)(b). Prepayment charges remain permissible subject to board-approved policy and the disclosures already made. Reclassification to NBFC-ML after sanction does not convert the loan into one that is automatically exempt, the lender may only charge the fee that was originally disclosed and cannot levy any new or higher charges/penalty.
14. What would be the applicability of the Pre-payment Directions in various scenarios where floating rate business loan is availed?
The applicability of the Prepayment Directions should be based on the type of loan and the borrower to whom the loan has been extended. Here, given that the obligations and liability of the borrower and co-borrower is coextensive, in our view, the applicability of prepayment charges shall be determined considering both the borrowers. In our view, in case either the borrower or co-borrower is an individual or MSE, the restrictions prescribed under the Prepayment Directions shall be applicable. Hence, prepayment charges cannot be levied in the following scenarios, (in case of loan for business purpose by NBFC-ML, only upto sanction limit of ₹50 lacs):
| Main borrower/Applicant | Co-borrower/Co-applicant |
| Individual | MSE |
| Individual/ MSE | Non-MSE/ Non-Individual |
| Non-MSE/ Non-Individual | Individual/ MSE |
Accordingly, in case applicable lenders intend to take an exposure on non-MSE or non- Individual and levy prepayment charges, it may refrain from having any individual or MSE as the co-borrower. The levy of prepayment charges, however, shall not be impacted in case individuals or MSE are acting as guarantors.
15. What are the parameters that lenders should check for determining the applicability for levy of prepayment charges?
To understand the restrictions and applicability, the following approach may be applied by the lenders:
- Who is the lender?
- Who is the borrower?
- Individual
- MSE?
- End use of the loan:
- Business
- Other than for business purpose
- Interest rate fixation – fixed/floating
- What is the nature of the loan?
- Home loans/ non home loans
- To be prepaid out of borrowing, say, balance transfers
- Other prepayments
- Non home loans
- Home loans/ non home loans
- Amount of the loan sanctioned
Based on the response to the aforesaid question, the various permutations and combinations that can be arrived at, has been demonstrated below:
Further, the snapshot of the applicability is as follows:
| Levy for Prepayment Charges | |||||||
| Type of Loan | Type of Interest | End Use/ Sanctioned Amount | NBFC-BL | NBFC-ML (other than HFCs) | NBFC-UL (other than HFCs) | HFCs | Banks (excluding payment banks) |
| Loans to Individuals | Fixed Rate | For Personal Use | Can be levied | Can be levied | Can be levied | Can be levied (except for housing loans foreclosed with own sources) | Can be levied |
| For Business Use | Can be levied | Can be levied | Can be levied | Can be levied | Can be levied | ||
| Floating Rate | For Personal Use | Cannot be levied | Cannot be levied | Cannot be levied | Cannot be levied | Cannot be levied | |
| ≤ ₹50 lacs sanctioned for Business Use | Can be levied | Cannot be levied | Cannot be levied | Cannot be levied | Cannot be levied | ||
| > ₹50 lacs sanctioned for Business Use | Can be levied | Can be levied | Cannot be levied | Can be levied (except for HFCs in Upper Layer) | Cannot be levied | ||
| Loans to Micro Small Entities | Fixed Rate | Any quantum | Can be levied | Can be levied | Can be levied | Can be levied | Can be levied |
| Floating Rate | ≤ ₹50 lacs sanctioned | Can be levied | Cannot be levied | Cannot be levied | Cannot be levied | Cannot be levied | |
| > ₹50 lacs sanctioned | Can be levied | Can be levied | Cannot be levied | Can be levied (except for HFCs in Upper Layer) | Cannot be levied | ||
| Loans to non-MSEs | Fixed | Any quantum | Can be levied | Can be levied | Can be levied | Can be levied | Can be levied |
| Floating | Any quantum | Can be levied | Can be levied | Can be levied | Can be levied | Can be levied | |
Note that in cases where pre-payment charges can be levied, the same has to be as per the internal board approved policy.
B. Regulatory requirements in case of floating rate loan:
16. Under the Prepayment Directions, what are the specific conditions under which floating rate interest loans are exempt from or subject to prepayment charges?
In case of floating rate loans, the Prepayment Directions provides as follows:
- No prepayment charges on loans (other than business purposes) to individuals, with or without co-obligant(s) irrespective of the amount;
- No prepayment charges on business loans to individuals/MSEs (irrespective of the repayment source, prepayment amount, or lock-in period.)by:
- Commercial banks (excluding SFB, RRB and LAB), Tier 4 Primary (Urban) Co-operative bank, NBFC-UL and AIFI.
- SFB, RRB, Tier 3 Primary (Urban) Cooperative bank, SCB, Central Cooperative bank and NBFC-ML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to ₹50 lakh.
17. Post notification of the Prepayment Directions, how has the scenario changed for NBFCs and Banks in case of floating rate business and personal loans?
With respect to the levy of prepayment charges, the restrictions applicable in case of NBFCs and Banks for floating rate business loan to individual and MSE, before and after the notification of the Prepayment Directions, can be understood as follows:
| Type of RE | Before January 1, 2026 | From January 1, 2026 |
| Bank/NBFC-UL | No regulatory bar on levy or pre-payment charges. The levy shall be as per the board approved policy of the lender. | Prepayment charges cannot be levied. |
| NBFC-ML | Prepayment charges cannot be levied on loans with sanctioned amount/ limit up to ₹50 lakh | |
| NBFC-BL | No change |
In case of floating rate personal loan to individuals, prepayment charges cannot be levied by banks and NBFCs (including HFCs). There is no change in this requirement.
18. The limit of ₹50 lakh for not levying the pre-payment charges is on the sanctioned amount or on the amount disbursed or outstanding?
Para 5(ii)(b) of the Prepayment Directions uses the phrase “sanctioned amount/ limit up to ₹50 lakh” for not levying the prepayment charges. The actual disbursement will not be relevant.
19. Whether the limit of ₹50 lakh is to be checked at the entity level or total aggregate exposure of all the lenders on the concerned MSE/individual borrower?
The limit of ₹50 lakh in case of floating rate business loan extended by an NBFC-ML to individuals or MSEs is to be checked at entity level.
20. If an individual has taken a floating rate non-business loan of ₹1 cr. and a floating rate business loan of ₹40 lakh (sanctioned amount) by an NBFC-ML. In this case, if the borrower prepays the business loan, can prepayment charges be levied?
In this case, it is understood that a same individual borrower has availed two loan facilities, (i) personal loan and (ii) business loan on floating rate basis from the same NBFC-ML. Now, given the divergent provisions in case of personal loans and business loans, in our view, from the perspective of levy of prepayment charges, both the facilities should be checked on a standalone basis.
21. In case an NBFC-ML has sanctioned a floating rate term loan to an MSE of say, ₹60 lakh, however, at the time of prepayment the outstanding amount is less than ₹50 lakh (say, ₹40 lakh), in such scenario, can the lender levy prepayment charges?
Refer response to Q15, in the present case, given that the sanction amount is more than ₹50 lakh, in our view, the lender being an NBFC-ML can levy the prepayment charges, as per its internal board approved policy.
22. An MSE borrower has availed ₹1 crore floating rate business loan from an NBFC-UL. This entire loan was subsequently assigned to an NBFC-ML. Post assignment, if the borrower pre-pays the loan, will the assignee be eligible to charge a pre-payment penalty?
Pursuant to para 8 of the KFS Circular, “Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower.” Also, in cases where the KFS is not required to be provided, as a matter of fair lending practice, any subsequent charges/penalties cannot be levied which were not leviable/levied at the time of sanction of the loan.
In this case, the ₹1 crore floating rate loan was sanctioned by an NBFC-UL, which pursuant to para 5(ii)(a) of the Prepayment Directions is barred from levying any prepayment charges on floating rate business-purpose loans to individuals and MSEs, irrespective of loan size. Consequently, the original KFS and loan agreement carried no prepayment charges. Further, upon assignment, the NBFC-ML steps into the shoes of the original lender and must honour all original terms. It shall be noted that assignment is not a fresh sanction or renewal. Therefore, even upon assignment, the assignee (NBFC-ML) cannot levy prepayment charges upon the borrower’s prepayment, even though the loan amount exceeds ₹50 lakh due to the following reasons:
- The original lender (NBFC-UL) was prohibited from charging any pre-payment fee; and
- No disclosure with regards to prepayment charges have been made in the KFS.
23. Whether the limit of ₹50 lakh also applies in case of floating rate loan disbursed by a HFC?
Under the Prepayment Directions, floating rate loans to individuals and MSEs for business purposes enjoy a prepayment charge exemption up to ₹50 lakh when sanctioned by an NBFC-ML. HFCs, by default, fall under NBFC-ML classification. Therefore, an HFC, irrespective of its asset size, cannot charge a prepayment penalty on such loans up to ₹50 lakh as per para 5(ii) of the Prepayment Directions. It shall be noted that floating-rate loans above ₹50 lakh remain outside this cap and may attract pre-payment charges as per the HFC’s board-approved policy.
It may be further noted that in case of housing loans, extended to individuals for construction of a house, by HFCs, ₹50 lakh threshold under para 5(ii) of the Prepayment Directions shall not be relevant since such housing loans would be said to be for purposes other than business.
para 5(i) provides a blanket prohibition on pre-payment charges for floating-rate loans to individuals for non-business purposes, irrespective of the loan size.
24. What is the applicability of the Prepayment Directions in case of NBFC-BL?
NBFC-BL shall not levy prepayment charges for all floating rate loans granted for purposes other than business to individuals, with or without co-obligant(s). As regards the business loans, any levy of prepayment charges shall be governed by the board approved policy of the lender.
25. In case of floating rate loans, if the resets are after a longer duration, say 1 year, will the Prepayment Directions be applicable?
In the Prepayment Directions, floating-rate loans are inferred on the interest-rate basis, not by how frequently the rate resets. As a result:
- Any loan sanctioned or renewed as a floating-rate facility on or after January 1, 2026 will fall within the scope of these Directions, regardless of whether the tenure between rate resets is one year, six months or any other period.
- Accordingly, pre-payment charges cannot be levied on floating-rate loans to individual borrowers (non-business purpose) or to individuals/MSEs for business purpose (subject to institutional and loan-size exemptions in paras 5(i) & 5(ii)) of the Prepayment Directions even if the next rate reset is a year away.
- For borrowers or facilities not covered by the blanket exemptions (e.g., corporate floating-rate loans), pre-payment charges may be imposed as per the lender’s board-approved policy, but the loan remains ‘floating’ for the purpose of applying the Prepayment Directions.
To conclude, the provisions of the Prepayment Directions do not provide for any timeline for reset of the rates, accordingly, as long as the loan is at a floating rate, irrespective of the timeline for reset, the provisions for floating rate loans, shall apply.
C. Regulatory requirements in case of fixed rate loans:
26. What is the regulatory requirement for levy of pre-payment charges in case of fixed rate interest loan?
In case of fixed rate loans, the levy of pre-payment charges, if any, shall be based on the board- approved policy of the lender (Para 6 of Prepayment Directions). Such policy shall, at a minimum, cover the following:
- Coverage of the Policy
- Manner of determination of the rate of prepayment/foreclosure
- Instances for levy and waiver
- Disclosure requirements
- Review of the Policy
27. Post notification of the Prepayment Directions, how has the scenario changed for NBFCs and Banks in case of fixed rate business and personal loans?
There has been no change in case of fixed rate loans post enactment of the present Prepayment Directions.
28. Can prepayment charges be levied on fixed rate housing loans disbursed by an HFC?
In terms of para 85.6(a) of the HFC Directions, HFCs shall not charge pre-payment levy or penalty on pre-closure of housing loans in case of fixed interest rate loan if the same is preclosed by the borrower out of their “own sources”. The expression “own sources” for the purpose means any source other than by borrowing from a bank/ HFC/ NBFC and/or a financial institution.
D. Prepayment Charges and Conversion Treatment for CC and OD facilities:
29. How are cash credit/ overdraft facilities treated for levying pre-payment charges?
In case of CC and OD, pre-payment is basically the closure of the facility before the agreed due date. As per para 6 of the Prepayment Directions, for early closure of the facility, pre-payment charges shall be levied on an amount not exceeding the sanctioned limit. However, no charges shall be levied if the borrower intimates his/ her/ its intention not to renew the facility before the period as stipulated in the loan agreement and the facility gets closed on the due date.
30. How are conversions from OD/CC to term loans treated?
Converting the outstanding OD/CC balance into a term loan triggers a new sanction. Accordingly, in our view, if this conversion is before the agreed closure date of the facility, the response as is mentioned in Q24 above shall apply. However, if the conversion is at the instance of the lender, it shall not be considered for levy of prepayment charges.
E. Restrictions on Prepayment:
31. Can lenders impose restrictions on the borrower to exercise the prepayment option in the form of (i) minimum lock-in period, (ii) minimum amount/percentage of prepayment or (iii) maximum number of prepayments?
Prescribing a minimum lock-in period would have the same effect as a prepayment penalty. Hence, lenders are restricted from prescribing any minimum lock in period in case of floating rate loans to individuals for personal use and to individual/ MSEs for business purposes as per Para 5(i) and 5(ii).
| Restriction | Floating Rate loans covered under para 5 (i) and (ii) | Other loans |
| Minimum lock-in period | Cannot be specified by the lender. | Reasonable lock-in say in case of long tenure loans can be specified. |
| Minimum amount/ percentage of prepayment | The provisions are silent on the same, however, in our view, given the operational issues, a reasonable amount/ number of EMIs can be specified to be considered for prepayment.. | A reasonable amount/ number of EMIs can be specified considering operational challenges. |
| Maximum instances of prepayment option | The provisions are silent on the same, however, in our view, given the operational issues, a reasonable number can be specified for the borrower to exercise the prepayment option. | Can be specified based on operational issues. |
It may be noted that refusing to accept early repayment of debt would be considered an “unfair contract” under Consumer Protection Act, 2019 (Section 2(46)). Hence, in cases where the lender may impose a prepayment penalty but it has prescribed restrictions such as lock-in period or minimum percentage of prepayment, the same may be seen as an unfair practice.
32. Will lock-in period be allowed in case of hybrid ROI loans?
The bar on levy of prepayment charges under the Prepayment Directions is on floating rate business loans to individuals and MSE. Now, if the interest rate on the loan is structured in such a manner that for the initial period of say, 2 years, it is on fixed rate basis, and thereafter floating, in our view, lock-in restrictions may be applicable for the period when the loan is on fixed rate.
33. With the removal of lock-in, does it make sense for lenders to offer hybrid interest rate loans?
Given commercial considerations (such as various costs incurred by the lender, like the admin costs), a hybrid interest rate model with part-fixed and part-floating rate of interest may be explored by lenders (which is practiced by many housing finance institutions).
During the fixed-rate period, the lender may have a lock-in period / levy prepayment penalty as per its Board Approved Policy as per Para 6 (except in case of HFCs where borrower has prepaid with own funds). During the floating rate phase, there cannot be any lock-in period, however, a reasonable minimum amount/ minimum number of EMIs/ maximum instances can be specified to be considered for prepayment
34. In light of the Prepayment Directions, what additional items should be covered in the prepayment charges policy?
As regards the contents of the policy, in our view, considering the intent and requirement in the present case, the policy among other things must also ensure the following:
- For term loans, pre-payment charges shall be based on the amount being prepaid.
- For cash credit/ overdraft facilities, pre-payment charges on closure of the facility before the due date shall be levied on an amount not exceeding the sanctioned limit.
- Further, no pre-payment charges shall be applicable if the borrower intimates the lender of its intention not to renew the facility before the period as stipulated in the loan agreement and the facility gets closed on the due date.
35. Can an RE levy prepayment charge, if the same is effected at its own instance?
Para 8 of the Prepayment Directions clarifies that an RE shall not levy any charges where pre-payment is effected at the instance of the RE.
36. What is the meaning of “pre-payment is effected at the instance of the RE”?
The literal meaning of the phrase is, whenever the lender is asking the borrower to prepay the loan before the due date. This would refer to such cases where the lender has a right to force prepayment/ accelerate repayments upon occurrence of such events as specified in the loan agreement. For instance, occurrence of any event of default or any adverse material change, consequent to which the lender may ask the borrower to either prepay the loan or accept higher interest. Further, in case of CC/OD, the lender may offer the borrower to convert the facility to a term loan before the end of term of the facility.
F. Co-lending and Digital Lending:
37. In a co-lending arrangement between (i) NBFC-UL and ML, (ii) NBFC-UL and BL, (iii) NBFC-ML and BL, what will be the applicability of the Prepayment Directions for floating rate business loan to individual/MSE?
Given the dissimilar applicability of the provisions of the Prepayment Directions in case of NBFC-UL (cannot levy at all), ML (cannot levy where sanctioned amount is ≤ 50 lakh) and BL (to be guided by the board approved policy), the ambiguity w.r.t. the applicability of the Prepayment Directions will arise in case of co-lending by these entries.
Ideally, the prepayment penalty should be levied by the lenders on their respective loan share. Hence, the borrower should be informed and communicated about the levy of prepayment charge on one part of the loan (co-lent by NBFC-BL) and no charges on the other part (co-lent by NBFC-UL). At the time of prepayment, the amount shall be distributed between the co-lenders based on the respective loan share and the prepayment charges shall only be levied on one part.
Alternatively, the lenders may mutually agree to apply the restriction if applicable on any one of the co-lender, for the entire loans originated under a co-lending arrangement.
38. A borrower uses a digital lending app to pre-pay via UPI. The UPI app charges a convenience fee. Can this be levied if the underlying loan does not carry pre-payment charges?
Charges levied by UPI apps for making the payments are not linked with the prepayment charges. Accordingly, as per the usage terms of the application, the same may be levied.
G. Disclosure requirements:
39. What are the disclosure requirements under the Prepayment Directions?
The applicability or otherwise of pre-payment charges shall be clearly disclosed in (i) sanction letter and (ii) loan agreement. Further, in case of loans and advances where Key Facts Statement (KFS) is to be provided as specified in the Circular dated April 15, 2024 on ‘Key Facts Statement for Loans and Advances’ i.e., in cases of all retail and MSME term loan products, the applicability or otherwise of the prepayment charges shall also be mentioned in the KFS.
40. How should the disclosure be given in KFS?
For loans requiring a KFS, the pre-payment charges section must list the exact charges or state “nil” if no charges apply.
H. Other concerns:
41. Can an RE waive off the charges at the time of pre-payment of loans and subsequently reimpose the same ?
The RE has the discretion to waive off the prepayment charges based on the merits of the specific case of the borrower. However, RE shall not levy any charges/ fees retrospectively at the time of pre-payment of loans, which were waived off earlier by the RE. [Refer Para 10 of the Prepayment Direction]
42. Can REs implement a slab-based charge to be levied based on prepaid percentage?
Yes, where charges are permissible, REs may structure a schedule of fees corresponding to the prepaid amount/percentage. This slab must be transparent, disclosed upfront and applied uniformly.
43. How will consortium or syndicated loans be handled?
In our view, pre-payments charges, if applicable, shall be as per the loan agreement executed between the lenders and borrower.
[1] Read our article “Do you pay to prepay?” analysing the Directions at: https://vinodkothari.com/2025/07/levy-of-prepayment-charges/
Please explain, how the Pre-payment directions are applicable on fixed rate loans – Since point 6 of Pre-payment directions says, the cases other than those mentioned in Para 5(i) and 5(ii) and the cases mentioned under Para 5(i) and 5(ii) relates to floating rate loans. The coverage is extended to Floating rate loans only under Point 5.