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Float Free! RBI Unchains Small Biz Loans from Prepayment Penalties

Updated: July 03, 2025 13:23

Image Source: Times of India
Stepping in large measure for the borrower rights cause and promoting financial inclusion, the Reserve Bank of India (RBI) has issued a circular prohibiting prepayment charges on floating-rate loans extended to micro and small enterprises (MSEs) and individuals for business purposes. The move is designed to enhance credit portability, reduce borrower grievances, and promote competition among lenders.
 
Banks and NBFCs will no longer be permitted to charge interest on early repayment of such loans starting from January 1, 2026. The supervisory checks by the RBI had uncovered divergent practices and restrictive terms in loan documents that deterred borrowers from availing lower lending rates.
 
Key Highlights
  • Who's Covered: MSEs and individuals holding floating-rate business loans.
  • Effective Date: It will come into effect for loans sanctioned or renewed on or after Jan 1, 2026.
  • No Lock-In: Borrowers can prepay without any minimum holding period.
  • Exceptions: Smaller lenders (e.g., small finance banks, regional rural banks) already barred from charging prepayment fees on loans up to ₹50 lakh.
Broader Impact
  • Encourages borrower mobility and competitive interest rates.
  • Aligns with RBI’s goal of affordable financing for small businesses.
  • Enhances transparency in loan agreements and sanction letters.
Sources: Business Standard, Fortune India, Economic Times, Times of India, Legal ET

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