In a major relief for loan borrowers, the Reserve Bank of India (RBI) has said that no prepayment charge will be levied on floating rate loans from January 1, 2026. That is, if you want to repay the loan before time, then no additional charge will have to be paid.
On which loans will this rule apply?
This new rule will apply only to those floating rate loans which will be approved or renewed on or after January 1, 2026.
The RBI has given clear instructions in this regard to all banks and regulated entities (REs) like non-banking financial companies (NBFCs):
If a person has been given a floating rate loan other than for business purpose (whether with or without co-obligant), then no prepayment charge will be levied on it.
Commercial banks have also been directed not to levy prepayment charges for floating rate loans given to individual businesses or micro and small enterprises (MSEs). However, some banks are outside this purview such as Small Finance Banks, Regional Rural Banks, Local Area Banks etc.
If these institutions give loans for loans up to Rs 50 lakh — such as Small Finance Banks, Regional Rural Banks, Co-operative Banks, NBFC-ML—then also prepayment charges will not be levied.
Who will benefit from this?
This decision of the RBI will directly benefit home loan and floating rate loan borrowers.
In today’s time, most home loans are on floating rates, so this step is a matter of relief for crores of customers. People taking loans from the MSE sector will also benefit from this step.
One special thing is that this rule will apply even if you repay partial or full loan together, no matter from which source the money comes and there will be no minimum lock-in period.
According to Adhil Shetty, Cofounder & CEO, Bank Bazaar, “Lenders often didn’t pass on lower interest rates when rates dropped, especially in the pre-MCLR regime. Recognizing that floating loan rates fluctuate with market conditions throughout a loan’s life, the RBI scrapped prepayment charges in phases with a view to ensure fairness for borrowers.”
“Over the last 13 years, this rule, first applied to banks for floating rate home loans and later extended to NBFCs and HFCs, and then extended to all floating rate retail loans, and now extended to MSMEs, empowers individuals to manage or switch loans conveniently. It boosts competition among lenders and ensures borrowers can always seek the best available rates,” he added.
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Why did RBI take this decision?
RBI took this decision because it observed that there is a lot of difference in the way different banks and NBFCs levy prepayment charges, leading to complaints and disputes from customers.
“Reserve Bank’s supervisory reviews have indicated divergent practices amongst Regulated Entities (REs) with regard to levy of pre-payment charges in case of loans sanctioned to MSEs which lead to customer grievances and disputes.”
“Further, certain REs have been found to include restrictive clauses in loan contracts/ agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service.”
Will this rule also apply to fixed term loans?
The RBI has said that in case of fixed term loans, if any RE levies prepayment charge, it should be based on the amount being prepaid.
In cash credit and overdraft facilities, if the customer informs in advance that he does not want to renew further and closes the account on time, then no prepayment charge will be levied.
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What if the bank itself asks for prepayment?
No charges can be levied in this situation also. Also, if a customer was waived off the prepayment charge earlier, then the bank cannot recover it retrospectively.
There should be clear information in Key Facts Statement
The RBI has also said that whether prepayment charge will be levied or not, its information should be clearly mentioned in the sanction letter and loan agreement.
Apart from this, these charges should also be clearly mentioned in the Key Facts Statement (KFS). If the bank has not mentioned it in KFS, then it cannot levy any prepayment charge.