The Reserve Bank of India (RBI) has decided to abolish the pre-payment charge on floating rate loan, giving relief to those taking loans. This charge loan was taken on a little or complete repayment of premature time. The new rule will be applicable from 1 January 2026. This will be mandatory for all banks and regulated institutions including non-banking finance companies (NBFC). This will directly benefit millions of loans, especially home loans and MSE borrowers.
Who will benefit from RBI’s decision?
This decision will benefit those people who have taken a loan at a floating rate from non-commercial work. Whether alone or with co-options. Anyone on all such loans Bank Or NBFC will not be able to charge pre-payment charge.
Apart from this, if the loan aim is business and it is taken by individual or micro and small enterprises (MSE), then the commercial banks (Commercial Banks) will not levy pre-payment charge. However, this exemption will not apply to certain category institutions.
Which institutions will not get the benefit of exemption?
- Small finance bank
- Regional rural bank
- Local area bank
- Tier-4 Urban Cooperative Bank
- NBFC–Upper Layer (NBFC-UL)
- All India Financial Institution
- Relief on loans up to ₹ 50 lakh
If a person or MSE has received a loan of up to ₹ 50 lakh from the institutions given above, then pre-payment charge will not be imposed on it. This includes Tier-3 Urban Cooperative Bank, State and Central Cooperative Banks, and NBFC-Middle Layer (NBFC-ML).
Why did RBI take this decision?
RBI said that under his supervision, it was revealed that many regulated institutions were adopting separate policy on pre-payment charge. Due to this, there was a situation of confusion and dispute among the customers. In addition, some institutions were incorporating restrictive clauses in the loan agreement so that customers could not switch to low interest rate options.
No difference from the source of pre-payment
RBI clarified that this relief would not depend on the source of repayment of loan. That is, whether the amount is partially given or the whole, and whether the funds have come from, there will be no charge. Also, any kind of lock-in period will not be mandatory.
What will happen on fixed term loans and overdrafts?
According to the new rules, if the pre-payment charge is also levied in the fixed term loan, then it should be based only on the pre-paid amount. At the same time, the rule is slightly different in cases of overdraft or cash credit. If the borrower reports not to renewed before time and stops the loan on the due date, no pre-payment charge will be levied.
Apparent information is important in KFS
The RBI has also directed that all the rules related to pre-payment charge should be clearly recorded in loan acceptance letters, contracts and Key Facts Statements (KFS). If no charge is already recorded in KFS, it cannot be recovered later. This decision is considered a major improvement towards customers’ transparency and competitive banking services.
Meaning of decisions for customers
This decision means that if you have taken a loan (such as home loan) at a floating rate and you want to repay it a little or before the scheduled time, then the bank or financial company will not be able to get any pre-payment penalty from you. Provided the loan is approved or renewed on 1 January 2026 or after that.
Till now, the bank people used to charge it every now and then so that the customer could not switch to any other bank’s cheap loan or will not pay quickly. This gave them a chance to earn full interest. But, this will not happen now.
This decision of RBI is a major step towards strengthening transparency and customer rights. Especially for those who want to take advantage of the fall in interest rates.