RBI: Now you can repay floating rate loans before time without any fee, rule will be applicable on non-business loans from 2026

There is now relief from paying heavy penalties for prepayment. RBI has instructed all banks and financial institutions that they will not charge any fee for prepayment on loans given to small enterprises and individuals. This rule will apply to loans taken or renewed after January 1, 2026. In a circular on Wednesday, RBI stated that reviews have shown MSEs often pay higher fees for repaying loans early. This causes disputes between lenders and customers. Some banks and financial institutions have included such rules in loan agreements, preventing borrowers from switching to other lenders for better interest rates or terms.

RBI clarified that there will be no prepayment charges on floating rate loans taken by individuals for non-business purposes. The new rule will cover all commercial banks (except payments banks), cooperative banks, NBFCs, and all India financial institutions.

RBI mentioned that in cases not covered by these rules, if there are prepayment charges, they must be clearly stated in the loan sanction letter and agreement. No hidden or undisclosed prepayment charges are permitted. If the lender initiates prepayment, no charges will be applied.

The central bank said that the new rule applies to both partial and full payments, regardless of the source of funds used for repayment. Additionally, there is no minimum lock-in period that banks or financial institutions can impose. The goal is to standardize lending practices and reduce customer complaints caused by inconsistent policies among financial institutions.