Alerts & Updates 3rd Jul 2025
The Reserve Bank of India (RBI), through its Directions dated July 02, 2025, has introduced a borrower-centric framework for the imposition of prepayment charges by regulated entities (REs). Historically, the imposition of such charges, especially in cases of floating rate loans, housing loans or early repayment from personal sources, was often criticized for being opaque or anti-competitive. Recognizing these concerns, the RBI has now drawn clearer boundaries by prohibiting prepayment penalties on certain categories of loans. While placing restriction on charging of pre-payment interest or charge in certain other categories of loan transactions and interest regime, the direction also recognises different between borrower segments, such as retail consumers and large-ticket commercial borrowers, and need to factor in risk profiles and asset-liability management (ALM) considerations.
This alert summarizes the key provisions of the RBI Directions dated July 02, 2025, on prepayment and also earlier direction on penal charges, and also traces the judicial approach adopted by courts and consumer forums in adjudicating such matters.
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