Objective
To ensure fair treatment for borrowers—especially Micro and Small Enterprises (MSEs) and individuals—by:
Eliminating pre-payment penalties in key cases.
Preventing anti-competitive clauses in loan agreements.
Promoting credit portability and better access to affordable finance.
🗓️ Effective Date
Applicable from: January 1, 2026
Applies to: All loans sanctioned or renewed on or after this date
🏦 Entities Covered
Commercial Banks (excluding Payment Banks)
Co-operative Banks
Non-Banking Financial Companies (NBFCs)
All India Financial Institutions (AIFIs)
🔑 Key Directions on Pre-payment Charges
- For Loans to Individuals (non-business)
✅ No pre-payment charges, regardless of co-borrower status. - For Business Loans to Individuals or MSEs
RE Type Pre-payment Charges Limit
Scheduled Commercial Banks (except SFBs, RRBs, LABs), Tier 4 Urban Co-op Banks, NBFC-UL, AIFIs ❌ Not allowed No limit
SFBs, RRBs, Tier 3 Urban Co-op Banks, State/Central Co-op Banks, NBFC-ML ❌ Not allowed Up to ₹50 lakh sanctioned limit
🔄 Applies irrespective of source of pre-payment and no lock-in period needed. - Dual/Special Rate Loans
Rule depends on whether the loan is in floating rate phase at the time of pre-payment.
📝 In Other Cases
Charges allowed as per RE policy, with conditions:
For term loans: based on amount being prepaid.
For CC/OD facilities: capped at sanctioned limit.
💼 Special Provisions
❌ No charges if:
Borrower gives prior notice not to renew CC/OD and closes on due date.
Pre-payment is initiated by the RE (e.g., forced closure).
✅ Full disclosure of pre-payment clauses in:
Sanction letter
Loan agreement
Key Facts Statement (KFS), if applicable
❌ No retrospective charges or reinstatement of previously waived charges.
🧾 Repeal Clause
Existing circulars/ Master Directions listed in the Annex will be repealed from Jan 1, 2026.
Those repealed will remain valid for transactions during their period of operation.
🧠 Implications for Stakeholders
🧑💼 Borrowers (Individuals & MSEs):
Increased freedom to switch lenders without penalty.
Encourages rate shopping and better negotiation.
🏦 Lenders:
Need to update loan agreements, KFS formats, and IT systems.
Greater compliance obligations under supervisory review.