RBI bans foreclosure fees on floating rate personal & small biz credit

MUMBAI: After banning penal charges for foreclosing/pre-payment penalties on mortgage loans a few years back, the Reserve Bank has barred all lenders from levying such charges on floating rate loans granted to micro and small enterprises.

The regulator has also debarred any lenders from penalizing personal loan borrowers if the credit is on floating rates.

In a circular issued late last night, the regulator said the new regulations will be applicable for all such loans sanctioned or renewed after January 1, 2026.

The RBI cited divergent practices among regulated entities with regard to levy of pre-payment charges in case of loans sanctioned to small businesses. And that it has found some lenders include restrictive clauses in loan contracts to deter borrowers from switching over to another lender.

The directions are meant for all commercial banks, tier IV urban primary co-operative banks, upper layer non-banking financial companies, and all-India financial institutions, the Wednesday night circular said, adding however, the directions will not be applicable to small finance banks, regional rural banks and local area banks.

“All small finance bank, a regional rural bank, a tier III primary urban co-operative banks, state cooperative banks, central cooperative banks and all medium layer NBFCs will not levy any pre-payment charges on loans with sanctioned amount/limit up to Rs 50 lakh,” the RBI said.

The regulator also said for all loans granted for the purposes other than business to individuals, with or without co-obligants, a regulated entity will not levy pre-payment charges.

In case of cash credit/overdraft facilities, no pre-payment charges will be applicable if the borrower intimates the lender of her intention not to renew the facility before the period as stipulated in the loan agreement, provided that the facility gets closed on the due date.