SIDBI, NHB, NABARD borrowers: what RBI's AIFI Responsible Business Conduct Directions 2025 promise you
RBI's 2025 conduct rules for SIDBI, NHB, NABARD, EXIM Bank and NaBFID: written rejection reasons, penal charges not penal interest, no prepayment fee on floating loans, 8 a.m.-7 p.m. calls.
Key points
- The RBI issued the AIFI Responsible Business Conduct Directions on 28 November 2025, binding EXIM Bank, NABARD, SIDBI, NHB and NaBFID.
- From 1 January 2026, these lenders cannot levy prepayment charges on floating-rate loans to individuals and Micro and Small Enterprises.
- Borrowers can cite specific paragraphs to contest penal interest, retrospective rate changes, recall without notice and recovery calls outside 8 a.m. to 7 p.m.
Photo: Subhrasingh / Wikimedia Commons, CC BY-SA 4.0 (cropped). File photo.
Most loan-defence writing in India is about banks and NBFCs. Yet five All India Financial Institutions (AIFIs) lend on their own books too: EXIM Bank, NABARD, SIDBI, the National Housing Bank (NHB) and NaBFID. On 28 November 2025 the Reserve Bank of India issued a single rulebook for how those five must treat borrowers: the Reserve Bank of India (All India Financial Institutions - Responsible Business Conduct) Directions, 2025, reference RBI/DOR/2025-26/336, DOR.MCS.REC.No.255/01-01-040/2025-26. The text on the RBI website is the version updated as on 1 July 2026.
This playbook walks through what those 37 paragraphs promise a borrower, in the order a loan actually runs: application, sanction, rate changes, default, recovery, prepayment and closure. It is general information, not legal advice on any individual loan.
The Statutory Position
The Directions are issued under Section 45L of the Reserve Bank of India Act, 1934, as their preamble records. Paragraph 2 says they took effect from the date of issue, 28 November 2025, unless a paragraph says otherwise, and paragraph 3 names the five AIFIs they bind.
Paragraph 34 repealed the older scattered instructions on responsible conduct for AIFIs, through circular DOR.RRC.REC.302/33-01-010/2025-26 of the same date, 28 November 2025. Paragraph 35 keeps alive any right, liability or legal proceeding that arose under the repealed instructions, so a dispute that began before November 2025 is not wiped out by the consolidation.
Paragraph 36 is the clause borrowers should remember: the Directions apply "in addition to, and not in derogation of" any other law in force. They therefore sit alongside, not in place of, recovery statutes such as the Recovery of Debts and Bankruptcy Act, 1993, under which Debts Recovery Tribunals (DRTs) hear recovery claims of banks and financial institutions of Rs 20 lakh and above.
The rulebook is organised into five chapters. The table below maps the paragraphs a borrower is most likely to need.
| Stage of the loan | Paragraph | What the AIFI must do |
|---|---|---|
| Application | 7-10 | Disclose all processing fees, the refundable amount if the loan is not sanctioned, and the "all in cost" |
| Application | 11 | Acknowledge every application and state the time frame for disposal |
| Rejection | 13 | Give the main reasons for rejection in writing, for every loan size |
| Sanction | 15-17 | Record your acceptance of terms; give a copy of the agreement and all enclosures |
| Rate changes | 21 | Give notice; apply changes in interest and charges only prospectively |
| Recall | 23 | Give notice before recalling the loan or demanding more security |
| Closure | 24 | Release securities on repayment; give full particulars before any set-off |
| Transfer | 28 | Convey consent or objection to a takeover request within 21 days |
| Default | 30 | Levy penal charges, not penal interest; no capitalisation |
| Prepayment | 31 | No prepayment charge on specified floating-rate loans from 1 January 2026 |
| Recovery | 27, 32 | No harassment; no recovery calls before 8 a.m. or after 7 p.m. |
| Grievances | 5-6 | Board-approved grievance mechanism; disputes heard at least one level higher |
Procedure Step by Step
Each obligation on the lender is a checkpoint for the borrower; here is the sequence.
- Before you apply (paragraphs 7-10). The application form must disclose processing fees, the amount refundable if the loan is not sanctioned or disbursed, prepayment options, penalties for delay, fixed-to-floating conversion charges and any interest reset clause.
- When you apply (paragraphs 11-12). Ask for the written acknowledgement under paragraph 11; it must state the time frame within which the application will be disposed of. If documents are missing, paragraph 12 says the AIFI must tell you "immediately".
- If you are rejected (paragraph 13). The main reasons must be conveyed in writing within the stipulated time, "for all categories of loans irrespective of any threshold limit". There is no minimum loan size below which reasons can be skipped.
- At sanction (paragraphs 14-17). Paragraph 14 bars the AIFI from using margin and security as a substitute for assessing creditworthiness. Paragraph 17 entitles you to a copy of the loan agreement and every enclosure it quotes, at sanction or disbursement.
- During the loan (paragraphs 20-21). Disbursement must be timely (paragraph 20). Any change in interest rates or service charges needs notice and can only operate prospectively (paragraph 21).
- If the AIFI wants to recall the loan (paragraph 23). Before recalling or accelerating payment, or seeking additional security, it must give notice as specified in the agreement or, where the agreement is silent, a reasonable period.
- If you default (paragraph 30). Only penal charges may be levied, disclosed upfront in the agreement, communicated with each reminder, and never compounded.
- If you want to prepay or switch (paragraphs 28 and 31). A takeover request must get a consent or objection within 21 days, and eligible floating-rate loans carry no prepayment charge.
- When you close the loan (paragraph 24). Securities must be released on repayment. If the AIFI wants to retain them against another claim, it must give notice with full particulars of that claim and the documents relied on.
- If something goes wrong (paragraphs 5-6). Use the AIFI's Board-approved grievance mechanism; the note to paragraph 5 requires that disputes over decisions of its functionaries are heard and disposed of at least at the next higher level.
Timelines matter in any dispute. The Directions fix some and leave others to the AIFI or to the contract, as this table shows.
| Event | Time limit | Source |
|---|---|---|
| Disposal of loan application | As stated in the acknowledgement | Paragraph 11 |
| Request for missing documents | "Immediately" | Paragraph 12 |
| Reasons for rejection | Within the stipulated time, in writing | Paragraph 13 |
| Consent or objection to account transfer | 21 days from receipt of request | Paragraph 28 |
| Notice before recall or extra security | As per agreement, else a reasonable period | Paragraph 23 |
| Penal charges regime for fresh loans | From 1 April 2024 | Paragraph 30 |
| Penal charges regime for existing loans | From 30 June 2024 | Paragraph 30 |
| No prepayment charge (eligible floating loans) | Loans sanctioned or renewed on or after 1 January 2026 | Paragraph 31 |
| Calamity fee waiver (discretionary) | Up to 1 year | Paragraph 33A, from 1 July 2026 |
Borrower Defences Available
These are the grounds a borrower can raise, in correspondence or before any forum, when an AIFI departs from the Directions. Each is tied to a paragraph number.
1. Penal interest dressed up as a rate increase
Paragraph 30(1) says a penalty for breaching material loan terms "shall not be levied in the form of 'penal interest' that is added to the rate of interest". Paragraph 30(2) separately bars the AIFI from introducing "any additional component to the rate of interest". If your statement shows the applicable rate jumping by a fixed margin after a missed instalment, that is the first thing to challenge.
The rule applies to fresh loans taken from 1 April 2024; for loans already running, the switch to the new regime applied from 30 June 2024.
2. Compounding of penal charges
Paragraph 30(1) bars capitalisation: no further interest may be computed on penal charges. Note (iii) adds that fresh penal charges cannot be levied on earlier outstanding penal charges. The AIFI may still charge interest on unpaid interest, including on an unpaid EMI, but only at the contracted rate until the default is cured, not at a penal rate.
3. Undisclosed or excessive penal charges
Under paragraph 30(6), the quantum and reason for penal charges must be disclosed upfront in the loan agreement and on the website under "Interest rates and Service Charges". A mere reference in the sanction letter to a schedule on the website "shall not suffice". Paragraph 30(7) requires the applicable penal charge to be stated in every reminder, and each actual levy and its reason to be communicated.
There is no rupee cap. Note (ii) to paragraph 30(4) says only that penal charges must be "reasonable", commensurate with the breach, and "not meant to be used as a revenue enhancement tool".
4. Prepayment charges on a floating-rate loan
Paragraph 31 covers term and demand loans sanctioned or renewed on or after 1 January 2026. The table below sets out who is protected. If you are weighing a part-prepayment, Oquilia's loan foreclosure calculator and prepayment benefit calculator show the interest saved.
| Borrower and loan | Prepayment charge from 1 January 2026 | Paragraph |
|---|---|---|
| Individual, floating rate, non-business purpose | Not permitted | 31(1) |
| Individual or Micro/Small Enterprise, floating rate, business purpose | Not permitted | 31(2) |
| Dual-rate loan, floating at the time of prepayment | Treated as floating; not permitted | 31(4) |
| Any loan, prepayment at the AIFI's instance | Not permitted | 31(7) |
| Charge not disclosed in sanction letter and agreement | Not permitted | 31(8) |
| Other loans (for example fixed rate) | As per AIFI policy, on the amount prepaid | 31(5) |
Paragraph 31(3) adds that the protection applies whatever the source of funds and "without any minimum lock-in period", so a lender cannot insist that a refinance from a competitor triggers a fee. Paragraph 31(9) bars reviving, at prepayment, any fee that was waived earlier. For background on the distinction, see Oquilia's glossary entries on the floating-rate loan and the prepayment penalty.
5. A retrospective rate or charge increase
Paragraph 21 requires notice of any change in terms, and says changes in interest rates and charges are to be "effected only prospectively". A demand that recomputes past instalments at a new rate can be resisted on this ground alone.
6. Recall without notice
Paragraph 23 requires notice before the AIFI recalls the loan, accelerates payment or seeks additional security. The notice period is whatever the agreement specifies or, if it is silent, "a reasonable period".
7. Withholding title documents after repayment
Paragraph 24 requires all securities to be released once the loan is repaid, subject only to a legitimate lien for another claim. Where the AIFI asserts such a right of set-off, it must give notice with full particulars of the remaining claim and the documents entitling it to hold the securities. A bare refusal to return title deeds after closure does not meet that standard. The glossary entry on collateral explains the underlying security.
8. Blocking a balance transfer
Paragraph 28 gives the AIFI 21 days from the date of receipt of a transfer request, whether from you or from the lender proposing to take over the account, to convey consent or objection. Keep a dated copy of the request. Oquilia's balance transfer calculator can show whether the switch is worth pursuing.
9. Harassment in recovery
Paragraph 27 bars "undue harassment", including persistently bothering borrowers at odd hours and the use of muscle power. Paragraph 32, which governs recovery agents, lists prohibited conduct in detail: verbal or physical intimidation, public humiliation, intruding on the privacy of family members, referees and friends, inappropriate messages on mobile or social media, threatening or anonymous calls, persistent calling, calls before 8:00 a.m. or after 7:00 p.m. for overdue loans, and false or misleading representations.
None of these defences erases a debt that is genuinely owed. They go to how much is payable, when, and by what conduct, and they are strongest when supported by the agreement, the statements and dated correspondence. Where an AIFI files for recovery of Rs 20 lakh or more before a Debts Recovery Tribunal, these paragraphs can be raised to contest the amount claimed.
Recent Tribunal/HC Position
The one judgement the Directions themselves cite is the Supreme Court's decision of 30 April 2025 in Pragya Prasun and Ors. v. Union of India and Ors., W.P.(C) 289 of 2024, decided with Amar Jain v. Union of India, W.P.(C) 49 of 2025, and reported as 2025 INSC 599. Paragraph 33 directs every AIFI to take "appropriate measures to ensure compliance" with that order.
The petitioners in W.P.(C) 289 of 2024 were acid attack survivors with facial disfigurement and eye injuries; the petitioner in W.P.(C) 49 of 2025 has 100% blindness. They had been unable to complete digital KYC because the "live photograph" test relied on blinking. The bench of Justice J.B. Pardiwala and Justice R. Mahadevan disposed of both petitions with 20 directions in paragraph 18 of the judgement.
Several of those directions bear directly on borrowers dealing with a regulated lender:
| Direction (para 18) | What the Court required |
|---|---|
| (iii) | RBI to issue guidelines for alternative ways of verifying "liveness" beyond blinking |
| (vi) | Regulated entities to accept an image of a thumb impression during digital KYC |
| (xv) | A dedicated grievance redressal mechanism for persons with disabilities |
| (xvi) | Human review of KYC applications rejected for accessibility reasons, with an officer empowered to override automated rejections |
| (xvii) | Dedicated helplines offering step-by-step KYC assistance by voice or video |
| (xx) | RBI to monitor strict adherence by all regulated entities |
For a borrower with a disability, the practical effect is that an AIFI cannot treat an automated KYC failure as the end of a loan application. Read with paragraph 13 of the Directions, which requires written reasons for every rejection, a refusal traced to an inaccessible verification step can be challenged on both grounds.
On the core lending paragraphs, the record is still thin. This desk has not verified any tribunal or High Court ruling that interprets the 2025 AIFI Directions specifically, so this playbook cites none. That is unsurprising for a rulebook that is under a year old and whose prepayment rule applies only to loans sanctioned or renewed from 1 January 2026. Borrowers raising these paragraphs today are therefore relying on the text of the Directions and on paragraph 37, which makes the RBI's own interpretation "final and binding".
The most recent change came through the Amendment Directions dated 29 April 2026, which inserted paragraph 33A with effect from 1 July 2026. It lets an AIFI, at its discretion, waive or reduce fees and charges for customers in areas where a calamity has been declared, for a period not exceeding one year. It is permissive, not mandatory, so a borrower can ask but cannot insist.
FAQ
Which lenders do the AIFI Responsible Business Conduct Directions 2025 cover?
Paragraph 3 names five: EXIM Bank, NABARD, SIDBI, NHB and NaBFID. Paragraph 3 names only these five institutions, so the Directions speak to loans they make themselves; a loan from a commercial bank, NBFC or housing finance company falls under that lender's own RBI rules.
Can SIDBI charge me a fee for prepaying a floating-rate loan?
Not if you are an individual or a Micro or Small Enterprise and the floating-rate loan was sanctioned or renewed on or after 1 January 2026, under paragraphs 31(1) and 31(2). There is no lock-in period, and the source of the funds does not matter under paragraph 31(3).
Is there a cap on penal charges under these Directions?
No rupee cap is prescribed. Paragraph 30(4) requires charges to be reasonable and commensurate with the breach, and note (ii) says they are not a revenue tool. They must be disclosed upfront in the loan agreement under paragraph 30(6) and cannot be compounded under paragraph 30(1).
How long can an AIFI take to respond to a balance transfer request?
Paragraph 28 sets 21 days from receipt of the request, whether it comes from the borrower or from the lender proposing to take over the account. The AIFI must convey either its consent or its objection within that window.
At what hours can recovery agents of an AIFI call me?
Paragraph 32 bars calls for recovery of overdue loans before 8:00 a.m. and after 7:00 p.m. It also bars threatening or anonymous calls, persistent calling and contacting family, referees or friends in a way that intrudes on their privacy.
Can an AIFI keep my property papers after I repay the loan?
Only if it has a legitimate lien for another claim against you. Paragraph 24 then requires it to give you notice with full particulars of that claim and the documents under which it is retaining the securities. Otherwise all securities must be released on repayment.
What can I do if an AIFI official rejects my complaint?
Paragraph 5 requires every AIFI to have a Board-approved grievance redressal mechanism, and its note says disputes arising from decisions of its functionaries must be heard and disposed of at least at the next higher level.