The Reserve Bank of India (RBI) has announced that lenders will no longer be allowed to impose pre-payment penalties on floating-rate loans. This new regulation, set to take effect on January 1, 2026, will apply to all loans and credit facilities sanctioned or renewed on or after that date.
The RBI stated that the decision is aimed at making credit more accessible and affordable, especially for Micro and Small Enterprises (MSEs), and at shielding individual borrowers from unfair lending practices.
Uniform Norms for MSEs and Individual Borrowers
As per the RBI, no pre-payment charges can be levied on floating-rate loans taken by individuals for non-business purposes — even in cases involving co-borrowers.
For loans used for business purposes by individuals and MSEs, commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks), Tier 4 urban cooperative banks, upper-layer NBFCs (NBFC-UL), and All India Financial Institutions are barred from levying pre-payment fees.
In addition, Small Finance Banks, RRBs, Tier 3 UCBs, State and Central Co-operative Banks, and middle-layer NBFCs (NBFC-ML) cannot charge pre-payment fees on loans up to ₹50 lakh.
Emphasis on MSE Finance
“Providing easy and affordable finance to MSEs is of paramount importance,” said the RBI, noting that its supervisory reviews found inconsistent practices among lenders, which led to customer complaints and disputes.
Relief for Overdraft and Cash Credit Borrowers
Borrowers with cash credit or overdraft facilities will also benefit. If the borrower notifies the lender in advance about their intention not to renew the facility and closes the account on time, no pre-payment charges can be levied.
Similarly, if the lender itself requests a pre-payment, no charges will be applicable in such cases.
Transparency Made Mandatory
To ensure clarity and avoid disputes, the RBI has made it compulsory for lenders to clearly disclose pre-payment terms in the sanction letter, loan agreement, and Key Facts Statement (KFS), where applicable.
“No pre-payment charges which have not been disclosed as specified herein shall be charged by a regulated entity,” the RBI emphasized.
Pre-Payment Allowed Anytime, No Lock-In
The RBI clarified that pre-payments — full or partial — can be made at any time, without a lock-in period, regardless of the source of funds.
Old Guidelines Repealed
These updated regulations override all previous circulars on the matter. The new guidelines were issued after reviewing public feedback on a draft circulated in February 2025.
Industry Reaction
SBFC Finance welcomed the RBI’s move. Sanket Agrawal, Chief Strategy Officer at SBFC, said, “This is a customer-centric move ensuring protection from unnecessary charges. However, as the rules apply only to new floating-rate loans from 2026, existing loan portfolios remain unaffected for now. The actual impact on prepayment income for lenders will materialize gradually.”
Agrawal added that the RBI has once again demonstrated a proactive approach to ensuring fair lending practices, especially for long-tenure loans.