By Kshipra Petkar
The Reserve Bank of India’s latest guidelines on pre-payment that bars banks, non-banking financial companies (NBFCs) and other lenders from charging prepayment penalty is likely to force these players to re-think their business models, said industry players.
These new norms will especially impact lenders, which are largely focussed on providing floating rate loans to micro, small and medium enterprises (MSME) and loan against property (LAP), and are likely to be more impacted than banks.
“Any MSME focused lender having long tenured floating rate loans will be largely impacted on account of non levy of prepayment penalty on floating rate loans,” Sachin Sachdeva, vice-president and sector head- financial sector ratings ICRA Limited said. “However, given that regulations are applicable on a prospective basis, the overall impact is expected to be limited”, he added.
The Reserve Bank of India on Wednesday released guidelines which stated that regulated entities cannot levy pre-payment charges on all loans which have been sanctioned or renewed on Jan 1, 2026. The guidelines are applicable for all floating rate loans and advances.
However, small finance banks, middle layer NBFCs and urban co-operative banks can apply pre-payment charges for business loans of up to Rs 50 lakhs.
“The directive will result in standardisation across lenders and is a welcome measure. Some part of the up to Rs 50 lakh market already operates under a fixed rate structure by virtue of which, pre-payment charges may continue for those customer segments,” Pinank Shah, CEO, Capital India Finance said.
The guideline also said that regulated entities will not levy any charges or fees retrospectively at the time of pre-payment of loans, which were waived off earlier by them. Deepak Aggarwal, Co-founder, Co-CEO, and CFO of Moneyboxx Finance, stated, “Lenders may increasingly transition towards offering fixed-rate loans. The cost of acquiring each customer is significant, and when customers refinance or switch to another lender prematurely, prepayment charges serve to offset these acquisition expenses. Consequently, existing lenders are likely to explore strategies to recover these costs, either by implementing higher initial pricing or by shifting to fixed-rate loan structures.”