RBI Guideline: No Prepayment Charges on Floating Rate Loans to Individuals from January 1, 2026

The Reserve Bank of India (RBI) has issued new directives on loan prepayment charges to bring standardisation and relief to borrowers. The guidelines will take effect from January 1, next year, and apply to all commercial banks (excluding payments banks), cooperative banks and non-banking financial companies (NBFCs).

No Prepayment Charges on Floating Rate Loans from January 1, 2026

Under the new guidelines, regulated entities cannot impose prepayment charges on floating-rate loans extended to individuals for non-business purposes. This provision directly benefits borrowers looking to repay home, education or personal loans ahead of schedule without facing additional costs.

MSEs and Business Loans Get Conditional Relief

The relief also applies to micro and small enterprises (MSEs). For loans availed for business purposes, no prepayment charges will be applicable if the lending institution is a commercial bank, NBFC upper layer (NBFC-UL), tier 4 urban cooperative bank or an all-India financial institution. In the case of small finance banks, regional rural banks, tier 3 urban cooperative banks, state and central cooperative banks and NBFC middle layer (NBFC-ML), the exemption is capped at loans sanctioned up to ₹50 lakh.

Policy-Based Charges Beyond Exemptions

For loans not falling under the above exemptions, lenders may still levy prepayment charges, but only as per their approved internal policy. The new rules enhance transparency by ensuring borrowers will not be surprised by undisclosed fees.

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Rules for Term Loans and Overdraft Facilities

In term loans, if any prepayment fee is to be applied, it must be calculated on the prepaid amount alone. For cash credit or overdraft facilities, such charges can only apply to amounts not exceeding the sanctioned limit. Borrowers can completely avoid prepayment charges on overdrafts if they notify the lender of their intent not to renew the credit line within the agreed terms of the loan.

Conclusion

The RBI’s revised directions add much-needed clarity and relief for borrowers. By easing the prepayment burden, they promote financial flexibility, especially for individuals and small business owners seeking to repay loans faster or switch lenders for better terms.

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