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New RBI guidelines banning prepayment charges on floating rate loans will impact MSME-focused lenders and those providing loans against property. Released last week, these rules, effective from January 1, 2026, mean regulated entities cannot charge for early repayment on such loans. Lenders may need to adjust business models, exploring fixed-rate structures or upfront pricing to recover costs. While small finance banks, middle layer NBFCs, and urban co-operative banks retain some flexibility for business loans up to INR 50 lakh, the directive aims to standardize practices across the financial sector.
MSME-focused lenders and those providing loans against property (LAP) in India will need to adjust their business models due to new banking regulations. As per guidelines released last week, the Central Bank has banned prepayment charges on certain types of loans, prompting lenders to rethink their pricing or loan structures. Advertisement
The new Reserve Bank of India (RBI) guidelines state that regulated entities cannot levy prepayment charges on all floating rate loans and advances. These rules will apply to loans sanctioned or renewed on or after January 1, 2026. Lenders will need to rethink their business models because of this. This could involve shifting to fixed-rate structures or implementing upfront pricing strategies to recover customer acquisition costs.
However, small finance banks, middle layer NBFCs (non-banking financial companies), and urban co-operative banks can still apply prepayment charges for business loans up to INR 50 lakh. Industry experts believe the overall impact on the sector will be limited, as the regulations apply to new or renewed loans, not existing ones.
Also, some parts of the market for loans up to INR 50 lakh already operate under a fixed-rate structure where prepayment charges may continue. Lenders are expected to explore various ways to recover customer acquisition costs, such as applying higher initial pricing or making a complete shift to fixed-rate loan structures. The directive aims to standardize practices across lenders, bringing more uniformity to loan terms and conditions.
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