RBI Bans Prepayment Penalties on Business Loans for MSEs, Individuals

24 Dec 2025 CW Team

At present, banks and non-banking financial companies (NBFCs) are barred from charging prepayment penalties only on floating rate term loans availed by individual borrowers for non-business purposes. The latest directive significantly widens the scope by extending the benefit to business loans taken by individuals and MSEs.

The RBI said easy and seamless access to finance for MSEs is critical, noting that supervisory reviews have revealed inconsistent practices among regulated entities in levying prepayment charges. Such inconsistencies, the regulator observed, have often resulted in prolonged customer disputes. Based on these findings and feedback received on a draft circular, the central bank issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025.

Under the new framework, commercial banks—excluding small finance banks, regional rural banks and local area banks—Tier 4 urban co-operative banks, NBFCs in the upper layer, and all-India financial institutions will not be allowed to charge prepayment fees on floating rate loans extended to individuals and MSEs for business use.

Further, for loans up to Rs 5 million taken for non-business purposes, small finance banks, regional rural banks, Tier 3 urban co-operative banks, state and central co-operative banks, and NBFCs in the middle layer are also prohibited from imposing such charges.

The directions apply irrespective of the source of prepayment and do not prescribe any minimum lock-in period. Cash credit and overdraft facilities are also covered, subject to timely intimation and closure. The RBI has mandated that all related terms be clearly disclosed in loan agreements and sanction letters.

In a major relief for borrowers, the Reserve Bank of India (RBI) has directed banks and financial institutions not to levy any prepayment or foreclosure charges on floating rate loans taken by individuals and micro and small enterprises (MSEs) for business purposes. The new rules will apply to all loans that are sanctioned or renewed on or after January 1, 2026.At present, banks and non-banking financial companies (NBFCs) are barred from charging prepayment penalties only on floating rate term loans availed by individual borrowers for non-business purposes. The latest directive significantly widens the scope by extending the benefit to business loans taken by individuals and MSEs.The RBI said easy and seamless access to finance for MSEs is critical, noting that supervisory reviews have revealed inconsistent practices among regulated entities in levying prepayment charges. Such inconsistencies, the regulator observed, have often resulted in prolonged customer disputes. Based on these findings and feedback received on a draft circular, the central bank issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025.Under the new framework, commercial banks—excluding small finance banks, regional rural banks and local area banks—Tier 4 urban co-operative banks, NBFCs in the upper layer, and all-India financial institutions will not be allowed to charge prepayment fees on floating rate loans extended to individuals and MSEs for business use.Further, for loans up to Rs 5 million taken for non-business purposes, small finance banks, regional rural banks, Tier 3 urban co-operative banks, state and central co-operative banks, and NBFCs in the middle layer are also prohibited from imposing such charges.The directions apply irrespective of the source of prepayment and do not prescribe any minimum lock-in period. Cash credit and overdraft facilities are also covered, subject to timely intimation and closure. The RBI has mandated that all related terms be clearly disclosed in loan agreements and sanction letters.

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