State Bank of India: Finally Abolishes penalty on pre payment of home loan

India's largest bank, SBI (State Bank of India) has decided to abolish pre payment penalty on housing loans.

According to SBI Senior officials,'' We have decided to do away with the pre payment charges on all kinds of home loans (floating and fixed rates) with effective November 21, 2011"

The SBI has been charging pre-payment penalties only on home loans with floating interest rates taken before May 2011.It has been charging nearly  2% of the outstanding amount as penalty if borrowers opted to pre payment their loans. The decision from the SBI will prompt other banks and housing finance companies to follow the suit.

The total outstanding home loan of SBI rose to Rs. 92,383 crore at the end of September, 2011 Verses Rs. 86,769 crore (13% of its loan book) in March 2011.

Now many me banks are charging up to 2% as pre-payment penalty on the loan outstanding, if a borrower settles the full payment before maturity by switching over to another bank or housing finance company.No pre-payment fine is charged if borrowers pay using their own funds.

It may be noted that the RBI (Reserve Bank of India) has indicated that it would scrap prepayment penalties charged by banks.

Prepayment Penalties  - Fixed Interest

Name	By Switching banks/HFCs	From own Source
ICICI Bank	2%	2%
Axis Bank	2%	2%
HDFC	-	2%

For Floating  Interest, there is  no  Prepayment Penalties

RBI had said in its mid-year credit policy review,  "Abolishes penalty on pre payment of home loan is proposed to implement the recommendations of the Damodaran Committee, on which a broad consensus has emerged, as also the action points which were identified by the Indian Banks' Association (IBA) and  Banking Codes and Standards Board of India  (BCSBI) in the last Banking Ombudsmen conference,"

Also NHB (National Housing Bank) the regulator of HFCs (Housing Finance Companies) directed housing finance companies not to charge any pre-payment penalty on home loans in cases where the borrowers had taken floating rate loans. But the NHB has not barred them from charging a penalty on loans linked to a fixed rate. Following this, all HFCs have waived off prepayment penalty on floating rate loans from October 19, 2011. But they continue to charge penalty  about 2 to 4%  on fixed rate loans. Among other banks, ICICI Bank charges a penalty of 2-4%.

According to Mr.  V. K. Sharma, CEO, LIC Housing Finance, “The income earned from pre-payment charges is minuscule at nearly Rs 3-4 crore. It was imposed more as a deterrent for switching from one bank account to another."

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