RBI Big Update! Good News, RBI Removes Prepayment Penalties on Floating Rate Loans for Micro, Small Businesses from January 2026
New Delhi: Reserve Bank of India (RBI) limits banks and non-banking financial companies (NBFCs) from levying prepayment charges on floating rate loans taken by MSEs or individuals for business purposes. The new rule will apply to all such loans sanctioned or renewed on or after January 1, 2026.
This decision comes under the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025, following a supervisory review that showed inconsistent and sometimes restrictive prepayment practices across lending institutions. In the review, RBI found hidden penalties or clauses that discourage borrowers from switching to lenders offering better terms.
New RBI Rules for Floating Rate Loans for Micro, Small Businesses
According to the RBI, no charges will be permitted for either full or partial prepayment of floating rate loans, regardless of the source of funds used. As per RBI, here will be no lock-in period, meaning the exemption applies from day one of the loan.
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RBI also clarified that in case of cash credit and overdraft facilities, prepayment charges would not apply if the borrower chooses not to renew the loan and repays the dues by the due date.
Certain lenders such as small finance banks, regional rural banks, state and central cooperative banks, and mid-tier NBFCs, are already barred from levying prepayment fees on loans up to ₹50 lakh.
To improve transparency, the RBI has directed lenders to mention prepayment terms in the sanction letter, loan agreement, and the Key Facts Statement (KFS). Lenders are also barred from applying retrospective charges or reintroducing any fees which were previously waived.
This decision follows public feedback on a draft circular issued in February and is a step towards standardising loan terms and protecting borrowers for micro and small business sector.
