New Delhi, July 3 (KNN) In a significant move aimed at enhancing credit accessibility for micro and small enterprises (MSEs), the Reserve Bank of India (RBI) has directed all banks and non-banking financial companies (NBFCs) to refrain from levying prepayment penalties on floating rate loans sanctioned or renewed from January 1, 2026.
Federation of Indian Micro and Small & Medium Enterprises (FISME) has welcomed the move.
“It has been a long battle to convince RBI and policy makers how pre-payment charges are being used as a coercive tool by banks to dissuade MSME clients against changing banks. We welcome the decision taken by the RBI. However, we are examining the fine print”, posits FISME’s official communique.
Citing the critical importance of affordable and flexible credit for MSEs, the central bank noted that its supervisory reviews had uncovered inconsistent practices among lenders.
These disparities, particularly in the imposition of prepayment charges, were found to have caused borrower grievances and contractual disputes.
“Further, certain regulated entities have been found to include restrictive clauses in loan agreements to deter borrowers from switching to other lenders—whether to access lower interest rates or better service terms,” the RBI said in a notification issued late Wednesday, explaining the rationale behind its decision.
Such practices, the central bank warned, undermine borrower choice and healthy market competition. However, the directive exempts certain categories of lenders from this restriction.
Small finance banks, regional rural banks, Tier-3 primary (urban) co-operative banks, state and central co-operative banks, and NBFCs classified under the middle layer were already barred from charging prepayment fees on loans up to Rs 50 lakh.
“In case of cash credit or overdraft facilities, no prepayment charges shall be applicable if the borrower intimates the regulated entity of their intention not to renew the facility before the period as stipulated in the loan agreement, provided that the facility gets closed on the due date,” the notification stated..
This policy follows the central bank’s earlier direction prohibiting prepayment penalties on retail loans, reinforcing its commitment to borrower rights and financial inclusion in the credit market.
(KNN Bureau)
