The Reserve Bank of India (RBI) has announced that banks and lenders will no longer be allowed to charge pre-payment penalties on floating-rate loans. The new guidelines will take effect from January 1, 2026, covering all loans and credit facilities sanctioned or renewed on or after this date.
According to the RBI, this move is designed to make finance more affordable for Micro and Small Enterprises (MSEs) and protect individual borrowers from unfair lending practices.
Equal Treatment for Individuals and MSEs
Under the new rules:
- Lenders cannot charge pre-payment fees on floating-rate loans taken by individuals for non-business purposes, even if the loan has co-borrowers.
- For business loans availed by individuals and MSEs, no pre-payment charges can be levied by:
- Commercial Banks (except Small Finance Banks, Regional Rural Banks, and Local Area Banks)
- Tier 4 Urban Cooperative Banks
- NBFCs in the Upper Layer (NBFC-UL)
- All India Financial Institutions
Additionally, Small Finance Banks, Regional Rural Banks, Tier 3 Urban Cooperative Banks, State and Central Cooperative Banks, and NBFCs in the Middle Layer (NBFC-ML) cannot impose pre-payment fees on loans up to ₹50 lakh.
Focus on Small Business Finance
The RBI emphasized that supporting small businesses is a priority, stating:
“Availability of easy and affordable finance to MSEs is of paramount importance.”
The regulator also noted that reviews had found inconsistent practices regarding pre-payment charges, leading to frequent complaints and disputes.
No Charges on Early Closure of Overdrafts
The guidelines also cover cash credit and overdraft facilities. If a borrower notifies the lender in advance and closes the account on time, no pre-payment charges can be applied. Additionally, if the lender itself asks a borrower to pre-pay, no fees are permitted.
Transparency Requirements for Lenders
To improve transparency, lenders must clearly disclose pre-payment rules in:
- The sanction letter
- The loan agreement
- The Key Facts Statement (where applicable)
“No pre-payment charges which have not been disclosed as specified herein shall be charged by a regulated entity,” the RBI said.
No Lock-in Period for Pre-Payment
Borrowers will be able to pre-pay partially or fully at any time without a lock-in period, regardless of the source of funds.
Earlier Guidelines Withdrawn
With these new measures, all previous circulars and guidelines on pre-payment charges stand repealed. The fresh directions follow public feedback received on the draft circular issued in February 2025.
Industry Reaction
SBFC Finance welcomed the RBI’s decision. Sanket Agrawal, Chief Strategy Officer at SBFC Finance, commented:
“It is a positive move by the RBI to ensure that customers are protected from pre-payment charges on loan closure. However, since this applies to loans sanctioned from January 1, 2026, the impact on current loan books will be limited. Borrowers also typically don’t pre-pay long-tenure loans early, so the effect on fee income will take time.”
He added that the RBI continues to take proactive measures to protect customers and make credit more accessible at fair costs throughout the repayment cycle.
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