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Context:

The Reserve Bank of India (RBI) introduced new rules to prevent banks and Non-Banking Financial Companies (NBFCs) from charging prepayment penalties.

About Prepayment Penalties

Prepayment penalties are fees that lenders impose when borrowers repay their loans before the scheduled end of the loan term.

Lenders levy these charges to compensate for the potential loss of future interest income when a loan is repaid earlier than expected.

Impact on Borrowers => Penalties can deter borrowers from managing their finances optimally, such as repaying high-interest loans early, switching to another lender offering better rates, or consolidating multiple debts. They effectively limit a borrower's financial flexibility.

Key Provisions of the RBI (Pre-payment Charges on Loans) Directions 2025

Effective Date and Applicability => The rules apply to all loans and advances sanctioned or renewed on or after January 1, 2026. They cover a wide range of regulated entities, including commercial banks (excluding Payments Banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions.

Disclosure Requirements => Regulated entities must clearly disclose any applicable pre-payment charges in the loan agreements and sanction letters. Lenders are prohibited from retrospectively levying any fees or charges that they had previously waived off.

No Pre-payment Charges on Floating Rate Loans

For Individuals (Non-Business Purposes): Regulated entities cannot levy pre-payment charges on floating rate term loans given to individual borrowers for non-business purposes.
For Individuals and MSEs (Business Purposes): Bar commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks), and All India Financial Institutions from charging pre-payment fees on floating-rate loans extended to individuals and MSEs for business use.
For Other Lender Categories and Loan Amounts => Small Finance Banks, Regional Rural Banks, Tier 3 Urban Co-operative Banks, State/Central Co-operative Banks, and NBFCs–Middle Layer also cannot impose pre-payment charges on floating-rate loans with a sanctioned amount up to ₹50 lakh. This covers loans for both business and non-business purposes within this limit.

Exemptions => Cash credit and overdraft facilities are generally exempted from these pre-payment charges, provided borrowers give timely intimation for closure. Certain specific loan categories, such as foreign currency loans, export credit, trade credit, and structured obligations, continue to be governed by their respective regulatory frameworks and are not covered by these directions.

Source:

LIVEMINT

PRACTICE QUESTION

Q. "The relationship between fiscal policy and monetary policy is critical for macroeconomic stability." Discuss how the RBI coordinates with the government to achieve India's economic objectives. 150 words