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.

Infrastructure Urban

02 Jun 2026

VECV Sales Rise 7.8 Per Cent In May 2026

VE Commercial Vehicles recorded sales of 7,978 units in May 2026, compared to 7,401 units in May 2025, registering growth of 7.8 per cent. This included 7,789 units from the Eicher brand and 189 units from the Volvo brand.Eicher branded trucks and buses reported sales of 7,789 units during the month, up 7.3 per cent from 7,258 units a year earlier. In the domestic commercial vehicle market, Eicher sales rose 9.1 per cent to 7,375 units from 6,758 units in May 2025.Exports declined 17.2 per cent to 414 units from 500 units in the corresponding month last year. Volvo Trucks and Volvo Buses recor..

Infrastructure Urban

02 Jun 2026

Table Space Strengthens DESYN Leadership Team

Table Space has announced strategic leadership appointments within DESYN, its integrated Design and Build business, as it looks to strengthen operations across key enterprise and GCC markets in India. DESYN was launched as a strategic extension of Table Space’s workspace solutions portfolio to meet rising demand for agile, high-quality and rapidly deployable enterprise workspaces.Shruti Ookabhoy has joined DESYN as Executive Director and will lead the Design vertical, focusing on design capability, operational excellence and team development across markets. She brings over 22 years of experi..

Infrastructure Transport

02 Jun 2026

Concord Associate Bags Rs 2.79 Bn Kavach Order

Concord Control Systems said its associate company, Progota India, has received a Rs 2.79 bn domestic order from Indian Railways for the supply, installation, testing and commissioning of on-board Kavach 4.0 loco equipment.The order is scheduled for execution within 12 months and strengthens Concord’s role in India’s railway safety and signalling ecosystem. Kavach is India’s indigenous automatic train protection system, designed to improve operational safety by helping prevent signal passing at danger and reducing collision risks.Gaurav Lath, Joint Managing Director, Concord Control Syst..