RBI removes pre-payment charges on floating-rate loans for individuals and MSMEs from Jan 1, 2026, to ensure fair and affordable lending.


RBI Scraps Pre-Payment Charges on Floating-Rate Loans for Individuals and MSMEs from 2026




RBI Eliminates Pre-Payment Charges on Floating-Rate Loans for Individuals and MSMEs

The Reserve Bank of India (RBI) has announced that no pre-payment charges will be imposed on floating-rate loans availed by individuals and Micro and Small Enterprises (MSMEs). This rule will be effective from January 1, 2026, and will apply to all such loans sanctioned or renewed on or after this date.

This move is aimed at improving borrower protection and ensuring access to fair and affordable credit. Financial institutions and borrowers have welcomed the step, with SBFC Finance describing it as a customer-friendly reform.

Who Will Benefit from the New Rule

As per the new guideline:

  • Individuals who take floating-rate loans for personal, non-business use will not be charged any pre-payment penalties, even if co-borrowers are involved.
  • For business loans taken by individuals and MSMEs, no pre-payment charges can be imposed if the loans are with:
    • Commercial Banks (excluding Small Finance Banks, Regional Rural Banks, Local Area Banks)
    • Tier 4 Urban Cooperative Banks
    • NBFCs in the Upper Layer (NBFC-UL)
    • All India Financial Institutions (AIFIs)

Loans up to Rs 50 lakh taken from Small Finance Banks, Regional Rural Banks, Tier 3 Urban Cooperative Banks, State and Central Cooperative Banks, and NBFCs in the Middle Layer (NBFC-ML) are also exempt from such charges.

RBI Highlights Importance of Easy Finance for Small Businesses

The RBI emphasized the significance of easy and affordable credit access for small businesses. It noted that past supervisory reviews revealed irregularities in how lenders charged pre-payment penalties, resulting in borrower dissatisfaction and complaints.

The central bank stated, “Availability of easy and affordable finance to MSEs is of paramount importance.”

No Charges on Early Closure of Overdraft and Cash Credit

Borrowers using cash credit or overdraft facilities will also benefit from the new rules. If they inform the lender in advance about not renewing the facility and close the account on time, no pre-payment charges can be applied. Moreover, if the lender asks for pre-payment, no charges can be imposed either.

Mandatory Disclosure of Pre-Payment Terms

To increase transparency, RBI has directed all lenders to clearly mention the terms regarding pre-payment in:

  • Sanction letters
  • Loan agreements
  • Key Facts Statements (where applicable)

The central bank has made it clear that no charges will be allowed unless they have been disclosed as per the stated rules.

Additionally, these rules will apply regardless of the source of funds used for pre-payment and whether the loan is repaid partially or fully. There will be no lock-in period.

Earlier Guidelines Withdrawn

With the introduction of this new directive, the RBI has repealed all previous circulars on the matter. The updated guidelines follow feedback received from the public after the release of a draft circular in February 2025.

Industry Reaction

Reacting to the announcement, SBFC Finance welcomed the decision. Sanket Agrawal, Chief Strategy Officer at SBFC Finance, said, “This is a positive move by the RBI to protect customers from unnecessary pre-payment charges. While the immediate impact will be limited due to its applicability to future loans, it sends a strong message supporting customer rights.”

He also noted, “The RBI has taken proactive steps to ensure fair pricing and protect borrowers throughout the life of the loan.”


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