To revive demand in the housing industry, public sector banks in the country are planning to waive pre payment penalty on home loans up to Rs 20 lakh. "We are considering a proposal to either completely waive the pre-payment penalty or reduce it significantly," said a Chairman with a PSU bank.

Presently a pre payment penalty is charged from the borrower who decides to pre pay his loan before the stipulated tenure. Generally banks charge somewhere between 1% and 3% of the outstanding loan amount as a pre payment penalty.

Banks are considering giving up with this penalty to provide small ticket home loans at cheaper rates and relaxed norms. This measure would come in addition to the home loan interest rates cut that the PSU banks are planning to make on loans up to Rs 20 lakh. After the reduction the interest rates are expected to lie between 8% and 10%.

A decision in this regard is likely to come after the Indian Banks' Association (IBA) examines the proposal. Besides IBA is also considering the prospects to waive or scale down the processing fee and reduce the margin money requirement for small home loans. IBA Chairman TS Narayanasamy said, "We are examining the possibility of waiving the processing fee and bringing down the requirement of margin money."

Mr Narayanasamy said that IBA will soon declare a package for home loans of up to Rs 5 lakh and those between Rs 5 and Rs 20 lakh. He further informed that they are also on the final stages of a similar package designed for loans to small and medium enterprises. The IBA packages would include "several measures" in addition to a reduction in interest rates.

Many PSU banks including State Bank of India, Oriental Bank of Commerce and UCO Bank said that they are examining the possibility of reducing home loan rates by 100 to 300 basis points.

All these steps are taken to boost the housing sector that is facing slowdown from the recent past. It is well studied that the housing demand has spin-off effects in some other industries like cement and steel.