No prepayment penalty on business loans: RBI’s big relief for individuals and small enterprises
Mumbai, Jul 2 (PTI): The Reserve Bank of India (RBI) on Wednesday instructed banks and other financial institutions not to levy any pre-payment charges on all floating rate loans and advances, including those taken for meeting business objectives by individuals and micro and small enterprises (MSEs). These new rules will be enforced on all loans which are sanctioned or renewed on or after January 1, 2026.
According to the current norms, banks and NBFCs are already not permitted to impose foreclosure or pre-payment penalties on floating rate term loans given to individual borrowers for non business purposes. Still, the recent directives significantly expand the entire score by covering business loans in it.
The RBI through a circular stated that ensuring access to easy and seamless financing for MSEs is of ultimate importance. The regulator also noted that supervisory review revealed inconsistent practices among regulated entities (REs) regarding pre-payment charges are often resulting in long drawn customer disputes.
Based on public feedback on a draft circular along with these findings, the RBI issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025.
Under the new rules:
- Commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks), Tier 4 Urban Co-operative Banks, NBFCs–Upper Layer (NBFC-UL), and All India Financial Institutions cannot charge pre-payment fees on loans extended to individuals and MSEs for business use.
- For loans up to ₹50 lakh for non-business purposes, entities such as small finance banks, regional rural banks, Tier 3 urban co-operative Banks, State/Central Co-operative banks, and NBFCs–middle layer also cannot impose such charges.
- These directions apply regardless of the source of pre-payment and without any minimum lock in period. Further, cash credit and overdraft facilities are also exempted, provided timely intimation and closure.
These terms and conditions must be clearly disclosed in loan agreements and sanction letters.
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Disclaimer: This article is for informational purposes only. For specific guidance on RBI’s new pre-payment rules effective January 1, 2026, please consult your lender or financial advisor.
