From January 1, 2026, the RBI has cancelled the prepayment and foreclosure charges on floating-rate loans. This policy is applicable only for the loans which have been sanctioned or renewed on or after this date. The “Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025” issued by the central bank was based on the observations of “changing practices” among Regulated Entities (REs), which often led to customer complaints. By scrapping these charges, the RBI intends to give the borrowers more power to transfer the loans to other banks with lower interest rates or better service without being held back by penalty clauses.
Wide Compliance for Banks and Micro-Small Enterprises (MSEs)
The order applies to all floating-rate loans to individuals for personal non-business use, irrespective of the origin of funds or a minimum lock-in period. For business loans to individuals and Micro and Small Enterprises (MSEs), commercial banks are not allowed to charge these fees. But some entities, including Small Finance Banks, Regional Rural Banks, and certain NBFCs, are not required to follow this rule regarding loans exceeding ₹50 lakh. This planned move is thought to bring the cost of financing for the MSE sector down tremendously, hence contributing to the financial health and liquidity of small-scale entrepreneurs in the country.
Transparency in KFS and Disclosures
The RBI has established a requirement whereby the lender must clearly state the application of a prepayment penalty in the loan proposal and the contract in order to remove all doubts about the borrower. In addition, these conditions must be specified in the Key Facts Statement (KFS); a bank cannot charge for anything that is not included in the KFS. In the case of fixed-term loans, even though the bank may impose charges based on the prepayment amount, they must be calculated at actual cost. Such transparency measures are aimed at providing consumers with complete information regarding their financial responsibilities and so on, thus minimising the occurrence of hidden costs at the time of loan closing.