 "RBI, Reserve Bank of India")
The Reserve Bank of India (RBI) has directed banks and other lenders not to charge any pre-payment fees on floating-rate loans, including those taken for business purposes by individuals and micro and small enterprises (MSEs). The new rule will apply to all loans and credit facilities that are sanctioned or renewed from January 1, 2026, according to a report by the Press Trust of India.
Currently, lenders are not allowed to impose foreclosure or pre-payment penalties on floating-rate term loans given to individual borrowers, whether or not they have co-borrowers, for non-business purposes.
Need for fair lending practices
In a circular, the RBI highlighted that providing accessible and affordable finance to MSEs is “of paramount importance”.
However, supervisory reviews showed that lenders were following inconsistent practices when it came to charging pre-payment fees on loans given to MSEs. This inconsistency has led to complaints and disputes from customers, the RBI noted in its circular.
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 "Reliance Communications")
 "M Rajeshwar Rao, deputy governor at the Reserve Bank of India")
 "M Rajeshwar Rao, Deputy governor, RBI")
 "RBI, Reserve Bank of India")
Following a review of supervisory findings and public input on a draft proposal, the RBI has now released the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025.
According to these directions, for loans taken for business purposes by individuals or MSEs — regardless of whether they have co-borrowers — certain regulated lenders must not impose any pre-payment charges. These include:
Commercial banks (excluding Small Finance Banks, Regional Rural Banks, and Local Area Banks)
Tier 4 Primary (Urban) Co-operative banks
Non-Banking Financial Company – Upper Layer (NBFC-UL)
All India Financial Institutions
Other loan categories also covered
In addition, for loans taken by individuals for non-business reasons, lenders must not charge pre-payment fees, even if the loan has co-borrowers.
“A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFC-ML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to Rs 50 lakh,” the RBI said.
The central bank also clarified that this rule will apply regardless of where the money used for pre-payment comes from, whether the loan is repaid partly or fully, and without any minimum lock-in period.
Special provision for overdraft
The RBI added that no pre-payment charges will apply on cash credit or overdraft accounts if the borrower informs the lender in advance about their decision not to renew the facility, and the account is closed by the agreed due date.
Finally, according to the directive, lenders must clearly mention whether pre-payment charges are applicable or not in both the sanction letter and the loan agreement.
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