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Mumbai: Come January 1, 2026 and pre-payment charges on most floating rate loans are going to be history. Banks and NBFCs cannot impose pre-payment charges on loans and advances that have been given on a floating rate basis to individuals and micro and small enterprises, the Reserve Bank of India has said. These loans includes those taken for business purposes.
The banking regulator has issued a circular in which it said that micro and small enterprises must have access to easy and affordable financing and this principle was an outcome of that broader principle.
The RBI also said the new direction will be enforced irrespective of where the funds are being sourced to pay up the loan. Also there will be no minimum lock-in period before which a borrower cannot repay the loan amount.
The Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 said, "For all loans granted for business purpose to individuals and MSEs, with or without co-obligant(s), a commercial bank (excluding Small Finance bank, Regional Rural bank and Local Area bank), a Tier 4 Primary (Urban) Co-operative bank, an NBFC-UL, and an All India Financial Institution "shall not levy any pre-payment charges."
"A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFCML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to Rs 50 lakh," the circular mentioned.
The review of the principle on pre-payment charges followed a lot of customer grievances and reports of disputes flowing in over the past several years from individuals and banks who had to cough up additional charges when they went to repay their loans before the scheduled end of tenure of the loan.
The lender also has to mention in the sanction letter and loan agreement the non-applicability of the pre-payment charges. The central bank also applied the same approach to overdraft and/or cash credit facilities. It has said that "... no pre-payment charges shall be applicable if the borrower intimates the RE of his/ her/ its intention not to renew the facility before the period as stipulated in the loan agreement, provided that the facility gets closed on the due date".
In February this year, RBI had issued a draft circular asking banks and other lenders not to levy any prepayment charge on floating rate loans.
