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Banks (Finance)

RBI Directs Banks to Waive Pre-Payment Charges on Floating-Rate Loans and Advances

Strategic Insights

— 1 min read

The Reserve Bank of India (RBI) has issued a directive to banks and other lenders to waive pre-payment charges on floating-rate loans and advances, including those for business purposes, availed by individuals and micro and small enterprises (MSEs). This decision aims to promote easy and affordable financing to MSEs and address customer grievances and disputes related to pre-payment charges. The directive will apply to all loans and advances sanctioned or renewed on or after January 1, 2026.

Key Takeaways:

  • The RBI has directed banks and other lenders to waive pre-payment charges on floating-rate loans and advances for business purposes for individuals and MSEs.
  • The directive will apply to all loans and advances sanctioned or renewed on or after January 1, 2026.
  • For loans sanctioned to MSEs, banks and NBFCs were already not permitted to levy foreclosure charges/pre-payment penalties.
  • The RBI's supervisory reviews have indicated divergent practices among regulated entities (REs) with regard to the levy of pre-payment charges.
  • Small Finance banks, Regional Rural banks, Tier 3 Primary (Urban) Cooperative banks, State Cooperative banks, Central Cooperative banks, and Non-Banking Financial Companies - Micro Finance (NBFC-MF) shall not levy any pre-payment charges on loans with sanctioned amount/limit up to Rs 50 lakh.
  • 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.

Statistics:

  • The RBI has directed banks to waive pre-payment charges on floating-rate loans and advances for business purposes for individuals and MSEs.
  • The directive will apply to all loans and advances sanctioned or renewed on or after January 1, 2026.
  • Loans with sanctioned amount/limit up to Rs 50 lakh will not be subject to pre-payment charges for Small Finance banks, Regional Rural banks, Tier 3 Primary (Urban) Cooperative banks, State Cooperative banks, Central Cooperative banks, and Non-Banking Financial Companies - Micro Finance (NBFC-MF).
  • The norms will be applicable irrespective of the source of funds used for pre-payment of loans.

Sources:

  • Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025

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