Relief for small businesses: RBI bans prepayment penalties on MSE floating-rate loans.

By Aniket Chakraborty July 3, 2025 Arrow INDIA NEWS

The directive applies to loans sanctioned or renewed on or after January 1, 2026.

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RBI found banks using clauses to prevent MSEs from switching to cheaper lenders.

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These restrictive practices led to customer grievances and disputes, says RBI.

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MSE borrowers will now be free to prepay or switch lenders without penalties.

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Exception: Small finance banks, RRBs, co-operative banks, and some NBFCs already follow this rule.

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For overdrafts, no prepayment fee applies if the borrower opts out before renewal.

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The move aligns with RBI’s goal of making finance accessible and competitive for MSEs.

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Retail borrowers already enjoy similar protection from prepayment penalties.

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Starting 2026, India’s MSEs get a fairer shot at affordable credit and lender flexibility.

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