The Reserve Bank of India (RBI) has taken a borrower-friendly step — starting January 1, 2026, lenders can no longer charge prepayment penalties on new floating-rate loans given to micro and small enterprises (MSEs). While banks seem largely unaffected, non-banking financial companies (NBFCs) are in a tight spot.
For banks, fee income contributes less than 1% of their total earnings. So, even if they lose some of it due to this regulation, it's unlikely to cause major ripples. But NBFCs are a different story. They typically charge 2–5% prepayment fees and have a larger portion of their business — about 5% to 25% of their total assets — tied up in floating-rate MSME loans. That’s where the pressure is building.
Names like PNB Housing Finance, Aditya Birla Capital, and Piramal Enterprises could feel the sting more than others. According to an IIFL Securities report, they hold the largest shares of floating-rate MSME and property loans — PNB Housing at 27%, Aditya Birla at 26%, and Piramal at 22%. These companies stand to lose more in fee income and might also see increased pressure on margins as competition tightens.
An NBFC official admitted, “We currently charge around 4% for full early repayment and 2% for partial ones. With these changes, we’ll be forced to absorb that 2–4% loss.” That’s not a small number for businesses already walking a tightrope between cost and risk.
This move is part of RBI’s larger effort to streamline practices between banks and NBFCs. Currently, different lenders follow different rules — some allow lock-in periods or charge higher penalties, while others are more flexible. By removing these fees, RBI seems to be nudging everyone towards a level playing field.
Sachin Sachdeva of ICRA reportedly noted that this will hit the “non-operating income” of lenders who focus on MSMEs and offer long-term floating-rate loans. However, he also pointed out that it improves affordability for small borrowers — an important goal in itself.
From the borrower’s point of view, the move is clearly a relief. MSMEs often prepay loans when they get cheaper credit elsewhere or experience cash windfalls. Being able to close a loan without being penalised helps these businesses manage their cash flow better.
With this regulation kicking in, expect sharper competition in the MSME loan market, especially in loans against property.
According to the IIFL report, profitability in these segments could take a permanent knock. Bigger NBFCs and banks with lower cost of funds might still cope by focusing on smaller, high-yielding borrowers. But smaller lenders may find it harder to adjust.
A public sector bank official downplayed the impact, saying prepayment charges contribute only about 0.5–0.6% to their income. “Earlier, we could lock in borrowers for a certain period, but we’ll have to let go of that now,” he reportedly said.
