From Jan 2026, banks can’t levy pre-payment charges on business loans to MSEs, individuals

The Reserve Bank on Wednesday directed banks and other financial institutions not to levy pre-payment charges on loans taken by individuals and micro and small enterprises (MSEs) for business purposes.

The directive, which will apply to all loans sanctioned or renewed from January 1, 2026, covers commercial banks, cooperative banks, non-bank financial companies (NBFCs), and All India Financial Institutions, the central bank said in a notification.

The central bank stressed that the availability of easy and affordable financing to MSEs "is of paramount importance". However, it observed that some lenders include restrictive clauses in loan agreements to deter borrowers from switching to other lenders offering lower rates or better terms, leading to customer grievances and disputes.

“Reserve Bank’s supervisory reviews have indicated divergent practices amongst Regulated Entities (REs) with regard to levy of pre-payment charges in case of loans sanctioned to MSEs which lead to customer grievances and disputes,” the central bank said.

“Further, certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service,” it added.

Under the new rules, no pre-payment charges can be levied on floating rate loans extended to individuals or MSEs for business purposes. The exemption will apply irrespective of the source of funds used for pre-payment and without any minimum lock-in period, the RBI said.

However, for Small Finance Banks, Regional Rural Banks, certain cooperative banks, and mid-sized NBFCs, the waiver will apply only to loans up to ₹50 lakh.

"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", said the directions.

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, it said.

The central bank also clarified that the no pre-payment charge rule would apply irrespective of the source of funds used for repayment, and there would be no minimum lock-in period for the borrowers.

Pre-payment charges, if levied in other cases, should be based on the amount being prepaid in case of term loans, and in case of closure of cash credit or overdraft facilities before the due date, such charges should not exceed the sanctioned limit, the RBI added.