RBI Scraps Prepayment Charges on Floating-Rate Loans
A Game-Changer for NBFCs from January 2026
In a landmark move to empower borrowers and promote transparency, the Reserve Bank of India (RBI) has banned prepayment penalties on floating-rate loans taken by individuals and Micro & Small Enterprises (MSEs) — effective January 1, 2026.
💼 Key Highlights of the New Norms
✔️ No More Prepayment Charges:
Borrowers can now prepay floating-rate loans anytime, without incurring any penalty — even if the loan has co-borrowers.
✔️ Applies to Loans Up to ₹50 Lakh:
For NBFCs, Small Finance Banks, and Regional Rural Banks, this change applies to floating-rate loans of up to ₹50 lakh.
✔️ Zero Lock-in Period:
There’s no waiting period or hidden costs — borrowers have full flexibility to close or reduce their loans early.
✔️ Mandatory Disclosure:
Lenders must clearly mention prepayment clauses in all loan agreements to ensure transparency.
📉 What This Means for NBFCs
While the move benefits borrowers, it poses significant challenges for lenders, especially NBFCs:
🔻 Loss of Fee Income:
Prepayment charges (typically 2–5%) were a valuable revenue stream — now eliminated.
🔁 Increased Borrower Switching:
Without penalty, borrowers can easily shift to competitors offering better rates or digital ease.
⚠️ Competitive Pressure:
Smaller NBFCs may lose ground to larger players and banks with access to low-cost capital.
🧭 How NBFCs Should Respond
To thrive under the new norms, NBFCs must pivot strategically:
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Rethink Pricing Strategy:
Build more attractive and sustainable loan pricing to retain customers. -
Upgrade Digital Capabilities:
Enhance borrower experience through seamless digital journeys and efficient service delivery. -
Boost Internal Efficiency:
Focus on reducing operational costs and increasing productivity to safeguard margins.
💬 Need Help Navigating These Changes?
If you're unsure how these regulatory updates affect your lending operations, we're here to guide you. From compliance alignment to business model rethinking, our experts can help your NBFC stay ahead.
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