No Prepayment Penalties on Business Loans
The Reserve Bank of India (RBI) has directed banks and NBFCs not to charge any prepayment penalty on all floating-rate business loans taken by individuals and micro and small enterprises (MSEs), effective from January 1, 2026.
Who It Covers
- All floating-rate loans and advances sanctioned or renewed on or after January 1, 2026.
- Includes loans taken by individuals for business purposes.
- Applies to loans taken by micro and small enterprises (MSEs).
- Smaller lenders like SFBs, RRBs, and some co-op banks are exempt only for loans up to ₹50 lakh.
Why This Was Needed
- RBI found inconsistent practices that troubled borrowers when switching lenders.
- It noticed restrictive clauses used to discourage switching.
- The move aims to make financing easier and fair for small businesses.
Extra Rules
- Rules apply irrespective of repayment source and with no minimum lock-in period.
- For cash credit or overdraft accounts, no penalty if borrower gives notice before renewal and closes on time.
- Prepayment terms must be clearly stated in loan agreements and sanction letters.
- Lenders cannot impose penalties retrospectively.
This decision promotes transparency, strengthens borrower rights, and helps individuals and MSEs access credit more easily.