"We have decided to do away with the pre-payment charges on all kinds of housing loans with immediate effect," a senior official of the bank told PTI.
The bank has been charging pre-payment penalties only on housing loans with floating interest rates taken before May 2011, the official said. It has been charging about 2 per cent of the outstanding amount as penalty if borrowers opted to foreclose their loans.
The decision from the largest lender will prompt other lenders to follow the suit.
The total outstanding home loan of SBI rose to Rs 92,383 crore at the end of September against Rs 86,769 crore in March 2011.
At present, some banks are charging up to 2 per cent as pre-payment penalty on the loan outstanding, if a borrower settles the full payment before maturity by switching over to another lender.
No pre-payment fine is charged if borrowers pay using their own funds. It may be be noted that the Reserve Bank has indicated that it would scrap prepayment penalties charged by banks.
"It 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 IBA (Indian Banks` Association) and BCSBI (Banking Codes and Standards Board of India) in the last Banking Ombudsmen conference," RBI had said in its mid-year credit policy review.