RBI bars prepayment penalty on floating rate micro, small business loans
Mumbai, Jul 3, 2025
From January 2026, banks and NBFCs cannot charge micro and small businesses for early repayment of floating rate loans as RBI moves to enhance financing access
The Reserve Bank of India (RBI) has directed banks and non-banking financial companies (NBFCs) not to charge any prepayment penalty on floating rate loans to micro and small enterprises (MSEs), sanctioned or renewed from January 1, 2026.
Observing that “availability of easy and affordable financing to micro and small enterprises is of paramount importance”, the banking regulator said its supervisory reviews revealed divergent practices by lenders with regard to the levy of prepayment charges on loans sanctioned to MSEs, which led to customer grievances and disputes.
“Further, certain regulated entities have been found to include restrictive clauses in loan contracts or agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service,” the RBI said in a notification issued late on Wednesday, explaining the rationale behind its decision.
An exception has been made for small finance banks, regional rural banks, Tier-3 primary (urban) co-operative banks, state co-operative banks, central co-operative banks, and NBFCs in the middle layer. These entities are already not allowed to levy any prepayment charges on loans with a sanctioned amount or limit up to ₹50 lakh.
“These directions shall be applicable to all loans and advances sanctioned or renewed on or after January 1, 2026,” the RBI said.
“In case of cash credit or overdraft facilities, no prepayment charges shall be applicable if the borrower intimates the regulated entity of their 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,” the notification stated.
The regulator had already barred lenders from charging prepayment penalties for retail loan customers.
[The Business Standard]
