Banks can levy prepayment penalty on loans

I took a home loan from ICICI Bank five years back and am paying the EMIs regularly without any default. I now want to prepay the balance amount out of my own funds i.e. without taking another loan or transferring the loan to some other bank.  However, the bank is imposing a penalty of 2% on the balance amount. It was reported some time back that banks are not allowed to impose penalty on prepayment of home loans, which the bank denies. Please clarify on the present status on penalty imposed by banks on home loan prepayment as per RBI rules? —J Shirodker
The Reserve Bank of India has expressed its displeasure with a section of banks levying high prepayment penalty on foreclosure of housing loans. Incidentally, Competition Commission of India finds such penalty legally valid. National Housing Bank has directed housing finance companies in October last year not to levy any penalty in the event of foreclosure of housing loans, if the borrower pays from his/her own resources. However, banks like ICICI Bank ask home loan borrowers to pay up to 2% of the outstanding balance plus service tax and surcharges in case of full prepayment.

The writer is chief counsellor, Abhay credit counselling, a trust sponsored by Bank of India. He will answer credit card and loan queries and can be reached at dnadebtqueries@gmail.com