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In a move aimed at enhancing fair lending practices and improving access to affordable credit, the Reserve Bank of India (RBI) has prohibited pre-payment penalties on floating-rate loans availed by individuals and Micro and Small Enterprises (MSEs). The new norms will come into effect from January 1, 2026, and will apply to all loans and credit facilities sanctioned or renewed on or after this date.

Key Provisions of the RBI Guidelines

Ban on Pre-Payment Charges:

• Applicable to:
  • Individuals taking floating-rate loans for non-business purposes, even with co-borrowers.
    • Individuals and MSEs availing business loans.
• Lenders prohibited from imposing pre-payment penalties include:
  • Commercial Banks (except SFBs, RRBs, Local Area Banks)
  • Tier 4 Urban Cooperative Banks
  • NBFCs in the Upper Layer (NBFC-UL)
  • All India Financial Institutions (AIFIs)
• For smaller institutions like Small Finance Banks, RRBs, Tier 3 Urban Cooperative Banks, State and Central Co-op Banks, and NBFCs in the Middle Layer (NBFC-ML), the exemption from pre-payment charges applies to loans up to ?50 lakh.

Early Closure of Overdraft/Cash Credit:

• If the borrower informs in advance and closes the account on time, no pre-closure charges can be levied.
• If the lender requests prepayment, no charges are permitted in such cases either.

Transparency and Disclosure Requirements

• Lenders must clearly disclose the applicability or non-applicability of pre-payment charges in:
  • Sanction letters
  • Loan agreements
  • Key Facts Statement (KFS) (where applicable)
• Any charges not explicitly disclosed as per these guidelines cannot be imposed.

Pre-Payment Without Lock-in

• Pre-payment (partial or full) can be made without any lock-in period, and irrespective of the source of funds.

Rationale Behind the Move

• The RBI noted that inconsistent practices regarding pre-payment fees have led to customer disputes.
• Ensuring easy and affordable finance for MSEs is “of paramount importance,” the central bank emphasized.

Policy Continuity and Legal Update

• All earlier RBI circulars and guidelines regarding pre-payment charges stand repealed.
• The final guidelines were issued after considering public feedback on the draft circular (February 2025).

Significance for MSEs and Borrowers

• Enhances credit mobility and refinancing freedom for borrowers.
• Prevents penalty-driven disincentives for early loan closure.
• Aligns with the RBI’s broader goal of financial consumer protection and MSME support.