Will it be the axe for prepayment penalty?

Ramesh has been paying EMIs on his home loans for almost 5 years now and now he wants to prepay his home loan! But he is worried about the prepayment penalty that his bank would impose on him! But why would the banks or the lenders mind when you pay back early? Do you stand to lose out on this deal or do you gain? Why and when people should opt for prepayment?
What is prepayment? Why and when do people opt for it?
It’s just what the name implies: prepaying all or part of the loan amount before it is actually due. However, it is more complicated that it sounds! First, you will have to check your retail loan documents to find out if prepayment is allowed and the percentage of outstanding loan amount that you will paying towards prepayment penalty charges, if any.
You might want to prepay your home loan for two simple reasons. First, you could save on the net interest payable as longer loan tenure means more interest paid. The second reason is that you can own the asset earlier than planned.
You could decide to prepay your loan if you have the capacity to make larger payments or if you have had a promotion or received a bonus.
Why do banks charge penalty for prepayment?
Well, banks and lenders lend money in the form of loans only to make money out of service fees and interests. And this requires the loan to be open for a fairly longer duration to give profits. They cannot stop your legal right from making a prepayment. But at the same time prepayment would mean upsetting their profit calculations from interests. Hence, the banks and lenders impose a prepayment penalty to compensate a portion of the lost profit. Usually your loan agreement would have a clause defining your obligations and interest in case of prepayment in part or in full.

RBI’s current stand on this penalty
Recently the Reserve Bank of India (RBI) has hinted at drafting a policy to restrict banks from imposing prepayment penalty of retail loans. The proposed move follows many such complaints from loan borrowers paying EMIs based on the floating rate of interest. They feel that they are missing out on the benefits of periodical rate cuts in interest.
Recently, the anti-monopoly body Competition Commission of India (CCI) is dealing with complaints from loan borrowers against collecting prepayment penalties on home loans from major lenders in the country.
Prepayment penalties by different banks in India
Public sector banks charge 1 to 1.5 percent as prepayment penalty on outstanding loan amount and in the case of private banks it is between 2 and 4 percent.