RBI to Ban Prepayment Penalty on Floating Rate Loans for MSEs from 2026.
Banking & Finance
The Reserve Bank of India (RBI) has announced that from January 1, 2026, banks and NBFCs will not be allowed to levy prepayment or foreclosure charges on floating-rate loans granted to Micro and Small Enterprises (MSEs) up to ₹7.5 crore.
- In its Monetary Policy Committee (MPC) meeting held on October 6, 2024, RBI Governor Shaktikanta Das declared that Micro and Small Enterprises (MSEs) would receive the same protections as individuals by being exempted from foreclosure and prepayment penalties on floating-rate loans, starting January 1, 2026. This reform ensures uniform borrower rights.
- RBI issued a draft circular on February 21, 2025, inviting public comments until March 21, 2025. The draft proposes that all regulated entities (REs) like banks, NBFCs, and housing finance companies must allow prepayment without charges for MSEs and individuals, enhancing credit flexibility and transparency in the lending process.
- The exemption will apply to all floating-rate loans granted to MSEs up to an aggregate credit limit of ₹7.5 crore, as defined under the MSMED Act, 2006. The rule covers both business and personal purposes, regardless of the source of repayment, enabling easier refinancing and improved credit terms.
Main Point :- (i) The RBI’s supervisory findings revealed that several lenders imposed hidden or restrictive clauses that discouraged MSEs from switching to better lenders. This policy correction aims to eliminate such anti-competitive practices and empower borrowers to make credit decisions based on merit, pricing, and service quality.
(ii) Lenders will now be required to clearly disclose all terms related to prepayment and foreclosure in the Key Fact Statement (KFS) provided at the time of loan sanction. They will also be prohibited from imposing retrospective charges or penalties triggered by lender-initiated events such as loan recalls or restructuring.
(iii) This initiative supports India’s Ease of Doing Business agenda and promotes financial inclusion in the MSME sector. Welcomed by the Ministry of Finance under Union Finance Minister Nirmala Sitharaman, it is expected to reduce the cost of credit and promote competitive interest rates among lenders serving MSEs nationwide.
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