Regulatory Updates
RBI (Pre-payment Charges on Loans) Directions, 2025
The Reserve Bank of India (“RBI“) has vide notification dated on 2 July 2025 issued the RBI (Pre-payment Charges on Loans) Directions, 2025 (“Pre-Payment Directions“), which shall be applicable to all loans and advances sanctioned or renewed on or after 1 January 2026. The Pre-Payment Directions address the inconsistent and restrictive practices by Regulated Entities (“REs“) regarding pre-payment charges, which have caused customer grievances and deterred borrowers from switching to lenders offering better terms.
The Pre-Payment Directions prohibit REs from levying any prepayment charges on the following floating rate loans and advances (regardless of source of prepayment, full or part prepayment etc):
- Loans extended to individuals (with or without co-obligants) for non-business purposes
- Loans extended to individuals and Micro and Small Enterprises for business purposes by: (i) Commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks), Tier 4 Primary (Urban) Co-operative Banks, Non-Banking Financial Companies (“NBFC“) (Upper Layer), and All India financial Institutions; and (ii) Small Finance Banks, Regional Rural Banks, Tier 3 Primary (Urban) Co-operative Banks, State and Central Co-operative Banks, and NBFC (Middle Layer), for loans up to INR 50 lakhs.
Applicability of the directions for dual/ special rate (combination of fixed and floating rate) loans will depend on whether the loan is on floating rate at the time of prepayment.
For loans other than as mentioned above, REs may levy prepayment charges based on approved policies of the REs. In case of term loans, prepayment charges, if levied, shall be based on the prepaid amount and in case of 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.
The other key provisions of the Pre-Payment Directions are as follows:
- No prepayment charges can be levied if the prepayment is effected at the instance of the RE.
- All terms regarding the prepayment charges must be clearly disclosed in the sanction letter, loan agreement, and Key Facts Statement (where applicable).
- No undisclosed prepayment charges shall be charged by an RE.
- Retrospective charges or reimposition of previously waived charges are prohibited.
RBI (Investment in AIF) Directions, 2025
The RBI has, vide notification dated 29 July 2025, issued the RBI (Investment in AIF) Directions, 2025 (“AIF Directions”), which shall come into force from 1 January 2026, or from any earlier date as decided by a regulated entity (“RE“) as per its internal policy.
As a general requirement under the AIF Directions, an RE’s investment policy shall have provisions governing its investments in an alternative investment fund (“AIF“) Scheme, which are compliant with extant law.
The key provisions in relation to the limits on investments and provisioning under the AIF Directions are as follows:
- No RE shall individually contribute more than 10% of the corpus of an AIF Scheme.
- Collective contribution by all REs in any AIF Scheme shall not exceed 20% of its corpus.
- If an RE contributes more than 5% of the corpus of an AIF Scheme, which also has downstream investment (excluding equity instruments) in a debtor company of the RE, then the RE will be required to make 100% provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of the direct loan and/ or investment exposure of the RE to the debtor company.
- Notwithstanding the above requirement, if an RE’s contribution is in the form of subordinated units, then it shall deduct the entire investment from its capital funds proportionately from both Tier-1 and Tier-2 capital (wherever applicable).
The AIF Directions exempt outstanding investments or commitments of a RE, made with prior approval from the RBI under the provisions of Master Direction – Reserve Bank of India (Financial Services provided by Banks) Directions, 2016, from the first two limits on investments mentioned above. Further, RBI may in consultation with the central government exempt certain AIFs from the scope of the existing circulars and the AIF Directions except from the general requirements.
RBI (Co-Lending Arrangements) Directions, 2025
The RBI has, vide notification dated 6 August 2025, issued the RBI (Co-Lending Arrangements) Directions, 2025 (“Co-Lending Directions”), which shall come into force from 1 January 2026, or from any earlier date as decided by an RE as per its internal policy.
The Co-Lending Directions shall be applicable to co-lending arrangements (“CLAs“) entered by the Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks), All-India Financial Institutions, and, Non-Banking Financial Companies (including Housing Finance Companies) (collectively, “REs“).
The key provisions of the Co-Lending Directions are as follows:
- Minimum Retention Requirement (“MRR“): MRR has been reduced such that every RE involved in any CLA must retain minimum 10% of the individual loans in its books.
- Credit Policies of REs: The credit policy of an RE shall incorporate provisions relating to CLAs, including the internal limit for the proportion of their lending portfolio under CLAs; target borrower segments; due diligence of the partner entities; customer service and grievance redressal mechanism.
- CLA agreement: The CLA agreement must clearly outline the detailed terms of the CLA such as borrower selection criteria, specific product lines, areas of operations, fees payable for lending services, segregation of responsibilities etc.
- Disclosure in loan agreements: The loan agreement must clearly disclose the roles and responsibilities of each RE, including identifying the entity being the single point of interface with the customer. Any change in customer interface requires prior borrower intimation. Additionally, all relevant details of the CLA must be disclosed to the borrowers in accordance with the RBI Circular on ‘Key Facts Statement (KFS) for Loans & Advances’ dated 15 April 2024, as amended from time to time.
- Blended Interest Rate: The final interest rate shall be the blended interest rate calculated as an average rate of interest derived from the interest rates charged by respective REs, as per their internal lending policies and risk profile of the same or similar borrower, weighted by the proportionate funding share of concerned REs under CLA.
- Operational Arrangements: The respective shares of the REs must be reflected in its books within 15 days from disbursement. All disbursements and repayments (between REs and borrower) are to be routed through an escrow account maintained with a bank (which can also be one of the RE in the CLA) and the manner of appropriation between the originating and partner REs shall be specified.
- KYC norms: An RE involved under CLA shall comply with the KYC norms under the RBI Master Direction – Know Your Customer (KYC) Direction, 2016 and the partner RE shall be permitted to rely upon the originating RE for customer identification process.
- Transfers: If the originating RE is unable to transfer the loan share to the partner RE within 15 days from the date of disbursement by the originating RE, then such loan would remain in the books of the originating RE. Any subsequent transfers of CLA-originated exposures to third parties or transfers amongst REs must comply with the RBI Master Directions (Transfer of Loan Exposures) Directions, 2021, dated 24 September 2021. Such transfer to third parties shall require the mutual consent of both originating and partner REs. Each RE shall maintain a borrower’s account individually for its respective share.
- Default Loss Guarantee (“DLG“): Originating REs may provide a DLG up to 5 per cent (five per cent) of loans outstanding in the portfolio. All such guarantees must strictly adhere to Reserve Bank of India (Digital Lending) Directions, 2025.
- Asset Classification: REs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA. Classification by one lender of an exposure to the borrower as SMA/NPA, to apply to the exposure of the other lenders as well.
- Disclosures and reporting: REs must prominently disclose on their websites their active CLA partners, and include CLA details in their financial statements, such quantum of CLAs, weighted average rate of interest, fees charged / paid etc. Each RE must also report their share of the loan accounts to Credit Information Companies.
RBI (Non-Fund Based Credit Facilities) Directions, 2025
The RBI has, vide notification dated 6 August 2025, issued the RBI (Non-Fund Based Credit Facilities) Directions, 2025 (“NFB Directions”), which consolidate and harmonise earlier guidelines relating to Non-Fund Based (“NFB”) facilities such as guarantees, letters of credit, co-acceptances, etc. across REs.
The NFB Directions shall apply to the following REs: Commercial Banks, Primary (Urban) Co-operative Banks / State Co-operative Banks/ Central Co-operative Banks; All India Financial Institutions; Non-Banking Financial Companies including Housing Finance Companies in Middle Layer and above (such application to non-banking financial companies will be only for the issuance of partial credit enhancement) (collectively, “REs“). Further, the NFB Directions shall not apply to the derivative exposures of an RE, other than the general conditions.
The key provisions of the NFB Directions are as follows:
- General Conditions: An RE’s credit policy shall incorporate suitable provisions for NFB facility issuance, covering types, limits, appraisal, security, fraud prevention, monitoring, audit and internal controls. An NFB facility may only be issued on behalf of a customer who has a funded credit facility from the same RE with certain exceptions for partial credit enhancement facility, derivative contracts, counter-guarantees, etc. Once an NFB facility devolves into a fund-based facility, the prudential norms become applicable.
- All guarantees must be irrevocable, unconditional, and incontrovertible, with clearly defined invocation and settlement procedures. REs are required to set internal ceilings for guarantees, particularly unsecured ones.
- The total volume of guaranteed obligations of Primary (Urban) Co-operative Banks, Regional Rural Banks, Local Area Banks, State Co-operative Banks and Central Co-operative Banks outstanding at any time shall not exceed 5% of their total assets as per the previous financial year’s balance sheet. Further, unsecured guarantees of these REs shall be restricted to 1.25% of total assets, and breach of these stipulations as on the date of issue of these directions shall be corrected by 1 April 2027.
- Guarantees Involving Overseas Transactions: REs permitted as Authorized Dealers (“ADs“) may extend NFB facilities in accordance with regulations under the Foreign Exchange Management Act, 1999, for bona fide current or capital account transaction. AD banks are additionally permitted to issue guarantees to or on behalf of foreign entities, or their step-down subsidiaries in which an Indian entity has acquired control through the foreign entity, when such guarantees are backed by counter-guarantees or collateral from the Indian entity or its group company. However, these guarantees to or on behalf of foreign entities, or their step-down subsidiaries, must not be issued by banks for the purpose of raising loans/advances except for ordinary course of overseas business. Banks must also effectively monitor the end use of such facilities to ensure conformity with the business needs.
- Partial Credit Enhancement (“PCE“): Schedule Commercial Banks (excluding Regional Rural Banks); All-India Financial Institutions; and NBFCs may provide PCE to: (i) bonds issued by corporates / special purpose vehicles for funding all types of projects, and large non-deposit-taking NBFCs (including Housing Finance Companies) registered with the RBI with an asset size of INR 1,000 crores and above; and (ii) bonds issued by Municipal Corporations subject to adherence of Master Circular (Loans and Advances) Statutory and Other Restrictions dated 1 July 2015.
Reserve Bank of India (Know Your Customer (KYC)) (2nd Amendment) Directions, 2025
The RBI has, vide notification dated 14 August 2025, issued the RBI (Know Your Customer (KYC)) (2nd Amendment) Directions, 2025, amending the existing Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016. Key amendments include:
- Persons with disabilities have been specifically identified as “financially or socially disadvantaged” to protect them from frivolous denial of banking/financial facilities. The amendments mandate that no application for onboarding or periodic KYC updation shall be rejected without due application of mind and requiring officers to record specific reasons for any rejection.
- ‘Aadhaar Face Authentication’ has been recognised as an accepted form of biometric based e-KYC authentication.
- KYC requirements have been extended to occasional transactions of INR 50,000 or above, whether conducted as a single transaction or several transactions that appear to be connected, and international money transfer operations.
Ease of regulatory compliances for FPIs investing only in Government Securities
The Securities and Exchange Board of India (“SEBI”) has, vide circular dated 10 September 2025, introduced a simplified compliance framework for Foreign Portfolio Investors investing exclusively in Government securities (“GS-FPIs”) by modifying the Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated 30 May 2024.
Under the revised framework (effective from 8 February 2026), GS-FPIs get several relaxations in registration, disclosures, KYC periodicity, and transitional mechanisms, while retaining obligations in respect of material changes and safeguards on resident participation. Key changes include:
- GS-FPIs under fully accessible route will not be required to furnish investor group details during registration, a requirement that otherwise applies to all Foreign Portfolio Investors (“FPIs”).
- In case where NRIs or OCI or RIs are constituents of the applicants: resident Indian individual contributions to GS-FPIs must be made exclusively through the Liberalised Remittance Scheme (LRS) and can be in global funds only if Indian exposure is less than 50%.
- For renewal of registration (every three years), GS-FPIs need to only pay fees to their Designated Depository Participants (DDPs); they are exempt from submitting periodic declarations or “no change” declarations in respect of previously submitted information.
- GS-FPIs must notify SEBI (via DDPs) of all material changes (Type I or Type II) within 30 days, together with supporting documents.
- Transition is permitted between regular FPI and GS-FPI status: new applicants may designate themselves GS-FPIs at onboarding; existing FPIs may convert to GS-FPIs (subject to divesting non-Government securities holdings or establishing preventive controls), and GS-FPIs may transition back to regular FPIs by furnishing all additional disclosures as required.
- The periodicity of KYC review (by custodians / DDPs) for GS-FPIs will be harmonised with the KYC periodicity applicable to their bank accounts, as prescribed by RBI, reducing duplicative frequency.
Master Direction on Regulation of Payment Aggregators
The RBI has, vide notification dated 15 September 2025, issued the Master Direction on Regulation of Payment Aggregators, 2025 (“PA Direction“). The PA Direction applies to banks and non-bank entities undertaking the business of Payment Aggregators (“PAs“). In addition, the PA Direction also applies to all AD banks as well as scheduled commercial banks which engage with entities undertaking PA business, to the extent specified in the PA Direction.
The PA Direction introduces three categories of PAs: PA-Online (for online payments), PA-Physical (in person transactions), and PA-Cross Border (for international payments). It mandates merchant due diligence and KYC procedures. Non-bank PAs are required to maintain a dedicated escrow account with a scheduled commercial bank for all customer funds, adhere to prescribed settlement timelines, and submit quarterly and annual auditor certifications confirming compliance.
For more information contact:
Jhinook Roy
Partner & Practice Head – Finance
jhinook.roy@veritaslegal.in
DISCLAIMER
VERSED by Veritas Legal intends to provide the readers with an overview of some of the noteworthy legal developments for education / information purposes only. This newsletter should not be construed or relied on as legal advice, or to create a lawyer-client relationship. Readers should reach out to us for any specific factual or legal questions or clarifications; and are encouraged to seek legal advice before acting on any information provided herein. The enclosed information is available in the public domain and shall not be construed as dissemination of any confidential information.