RBI Bans Prepayment Charges on Floating-Rate Loans from 2026 to Empower Borrowers

In a major step towards enhancing customer rights and promoting transparent lending, the Reserve Bank of India (RBI) has announced that from January 1, 2026, banks and non-banking financial companies (NBFCs) will no longer be allowed to charge prepayment penalties on floating-rate loans sanctioned or renewed after this date.

What Does the New Rule Mean?

This change will directly benefit individuals and micro and small enterprises (MSEs) with floating-rate home loans or other floating-rate advances. Borrowers can now prepay these loans, either partially or fully, without worrying about any additional charges, irrespective of the source of funds used for prepayment.

Who Will Benefit?

• Individual borrowers with floating-rate loans for non-business purposes.
• Individuals and MSEs with floating-rate business loans.
• Borrowers with floating-rate home loans.
• MSE borrowers are looking for affordable credit options.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Scope and Applicability

The ban applies to all floating-rate loans sanctioned or renewed on or after January 1, 2026, by regulated entities such as:

• Commercial Banks
• NBFCs
• Other regulated financial institutions

Exemptions

Certain institutions can still impose prepayment charges in specific scenarios:

• Small Finance Banks, Regional Rural Banks, Local Area Banks
• Tier 4 Urban Cooperative Banks
• NBFCs in the Upper Layer (NBFC-UL)
• All India Financial Institutions
• However, even these institutions cannot levy prepayment charges on loans up to ₹50 lakh.

Why Did RBI Take This Step?

The RBI observed during supervisory reviews that lenders followed inconsistent practices in charging prepayment fees, causing confusion, disputes, and limiting borrower freedom to refinance loans. Some loan agreements even included restrictive clauses discouraging borrowers from switching lenders.

The RBI aims to encourage a competitive lending environment and ensure borrowers can close or switch loans without being penalised.

Rules for Other Loan Types

• Fixed-Term Loans: Prepayment charges, if any, will only apply to the amount being prepaid.
• Cash Credit/Overdraft Facilities: No prepayment charges if the borrower notifies the lender in advance about closure on the due date. Lenders cannot impose charges if they initiate prepayment.

Mandatory Disclosure for Lenders

To ensure transparency, the RBI has directed that:

• Sanction letters and loan agreements must clearly state prepayment rules.
• The Key Facts Statement (KFS) should include these details.
• No hidden charges beyond what is disclosed in the KFS can be imposed.

Conclusion

The RBI's directive to eliminate prepayment penalties on floating-rate loans is a progressive move to protect borrowers, especially individuals and MSEs. It encourages fair lending practices, boosts refinancing flexibility, and reduces financial burdens on borrowers. This decision is set to improve access to affordable credit and enhance customer confidence in India's lending system.