Why in news?
The Reserve Bank of India has banned lenders from charging pre‑payment penalties on floating‑rate loans taken by individuals or Micro and Small Enterprises (MSEs). The directive will apply to loans sanctioned on or after 1 January 2026.
What is pre‑payment?
- Mechanism: Borrowers can repay loans partially (part‑prepayment) or fully (foreclosure) before the scheduled tenure. This reduces the interest burden or shortens the loan term.
- Decision: The RBI directive prohibits banks from levying charges for pre‑payment of floating‑rate loans. It covers both partial and full pre‑payments, with no lock‑in period or restrictions on the source of funds.
Rationale & significance
- Unequal practices: Reviews found inconsistent and opaque rules across banks, leading to borrower complaints and discouraging early repayment.
- Ease of doing business: The reform reduces credit friction for MSEs, supports Atmanirbhar Bharat and enhances financial freedom for consumers.
- Consumer protection & transparency: Lenders must clearly disclose pre‑payment terms in the sanction letter and key facts statement.
- Financial inclusion: By encouraging borrowers—especially first‑time borrowers and women entrepreneurs—to access formal credit, the rule fosters competition and mobility across lenders.
Eliminating pre‑payment penalties promotes borrower rights, fosters competition and enhances transparency in lending.