The Reserve Bank of India (RBI) has directed state and central co-operative banks to stop levying penalty on pre-payment of home loans on floating interest rates with immediate effect.

In a notification, it said though many banks had in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there was a need to ensure uniformity across the banking system.

Earlier this month, RBI had also asked the commercial banks to stop charging such penalties. RBI said the removal of foreclosure charges or pre-payment penalty on home loans would lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans.