RBI directs banks, other lenders not to levy pre-payment charges on business loans to individuals, MSEs
The Reserve Bank of India (RBI) has directed banks and other lenders not to levy any pre-payment charges on all floating-rate loans and advances, including for business purposes, availed by individuals and micro and small enterprises (MSEs). The directions will be applicable to all loans and advances sanctioned or renewed on or after January 1, 2026. In terms of extant guidelines, banks and NBFCs are not permitted to levy foreclosure charges/pre-payment penalties on any floating rate term-loan sanctioned to individual borrowers with or without co-obligant(s) for purposes other than business.
In a circular, the RBI said the availability of easy and affordable financing to MSEs is of paramount importance. However, the Reserve Bank's supervisory reviews have indicated divergent practices among regulated entities (REs) with regard to the levy of pre-payment charges in case of loans sanctioned to MSEs, which lead to customer grievances and disputes. Based on a review of the supervisory findings and public feedback received on a draft circular, the central bank has issued the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025. For all loans granted for business purpose to individuals and MSEs, with or without co-obligant(s), a commercial bank (excluding Small Finance bank, Regional Rural bank and Local Area bank), a Tier 4 Primary (Urban) Co-operative bank, an NBFC-UL, and an All India Financial Institution shall not levy any pre-payment charges.
It further said also, for all loans granted for purposes other than business to individuals, with or without co-obligant(s), a regulated entity (RE) shall not levy pre-payment charges. A Small Finance bank, a Regional Rural bank, a Tier 3 Primary (Urban) Cooperative bank, State Cooperative bank, Central Cooperative bank and an NBFCML shall not levy any pre-payment charges on loans with sanctioned amount/ limit up to Rs 50 lakh. It also said the norms will be applicable irrespective of the source of funds used for pre-payment of loans, either in part or in full, and without any minimum lock-in period.
