Private lender, HDFC Bank has increased the prepayment penalty for its home loan borrowers who plan to switch to another lender. The bank is charging as high as 3% of the outstanding loan amount if its borrowers are prepaying their loans through availing credit from some other bank.

Industry experts feel that the bank has taken the move in order to discourage its existing customers from switching to SBI, which has recently cut its home loan rates to 8% for one year. This special scheme by SBI has ignited a conflict for the market share between HDFC and SBI. In fact HDFC Chairman Deepak Parekh called the SBI scheme a "gimmick". He said that the bank has taken the move to capture the market and attract the existing customers of other banks.

However the SBI loan comes with heavy front-end charges like mortgage registration but the 8% interest rate is significantly lower than the home loan rates offered by other lenders.

Commenting on HDFC's move of charging a high prepayment penalty, HDFC Deputy Managing Director Renu Karnad said, "Our prepayment charges have always ranged between 0% and 3%, depending on how long the borrower has been with us, where the funding is coming from and what the interest rate on the loan being prepaid is."

She pointed out that this was similar to the clause that banks lending to HDFC insist on. "In some cases the lenders ask for the difference between the contracted loan rate and market rate," she said.

HFDC has been charging 2% prepayment penalty for the loans that are prepaid within three years of availing the loan. This charge has been levied by the bank since last year. At the same time, the bank has exempted part-prepayment up to 25% of a loan from any such charge.

In fact most lenders in the industry are charging 2% for prepayment of loans by borrowing from other lenders. A spokesperson from ICICI Bank informed that the bank is charging 2% for prepayment irrespective of whether it is obtained by refinancing or foreclosed by the borrower. There is an additional service tax that altogether raises the prepayment penalty to nearly 2.25%.

HDFC said that they are taking all the moves to hold back their customer base. The bank further informed that if they declare scheme where lower rates are offered only to new customers then all floating rate borrowers who are paying higher rates will be allowed to switch to this scheme by paying a charge of 0.5%.

The scheme announced by SBI also does not offer the new rates to its exiting customers.