The Reserve Bank has directed banks and non-banking financial companies (NBFCs) not to levy any prepayment charges on floating rate loans extended to micro and small enterprises (MSEs), for loans sanctioned or renewed on or after January 1, 2026.
Highlighting the importance of "easy and affordable financing" for MSEs, the RBI said its supervisory reviews had revealed inconsistent practices among lenders in imposing prepayment penalties, resulting in customer grievances and disputes.
An exemption has been granted to certain categories of lenders, including small finance banks, regional rural banks, Tier-3 primary (urban) co-operative banks, state co-operative banks, central co-operative banks, and NBFCs in the middle layer. These institutions are already barred from charging prepayment penalties on loans with a sanctioned amount or limit of up to ₹50 lakh.
The RBI clarified that the new directive applies to all loans and advances sanctioned or renewed on or after January 1, 2026.
For cash credit or overdraft facilities, no prepayment charges shall apply if the borrower informs the lender in advance of their intention not to renew the facility—provided the account is closed on the due date, as per the loan agreement.
The RBI had previously prohibited lenders from imposing prepayment penalties on retail loan customers as well.