Geetika Pokhriyal, New Delhi: Imagine being penalised for wanting to pay up your loan before the given period.

"Unfair" you would say. Well, the national consumer redressal commission agrees with you.

They say banks cannot charge a penalty called the "pre-payment" fee.

Can a bank charge its customer a penalty if he chooses to close his loan before the term ends?

That's a question before the Supreme Court where the State Bank of India has filed a case against Dr Usha Vaid, claiming penalty charges.

Dr Vaid says the demand is unjust.

"They advertised that there will be no pre-payment charges, plus their rate of interest was less than Standard Chartered, so I shifted to them. Now they tell me there is a penalty because I want to prepay my loan. This is illegal," says complainant Sudarshan Vaid.

Dr Usha Vaid took a home loan of Rs 24.5 lakh from Tata Housing Finance in September 2001.

A year later, she prepaid the loan and switched to the Standard Chartered.

In November 2002, when the SBI cut interest, the Vaids switched to the SBI. Eventually in April 2004, the family transferred the loan to ICICI.

However, the SBI imposed a 2 per cent penalty or Rs 42,300 rupees as pre-payment fee.

"In this case, the agreement that was entered into categorically provided for the pre-payment clause. This is a classic case where the borrower has shifted four banks during a period of two and a half years," says Standing Counsel, SBI, Sanjay Kapoor.

Dr Vaid then approached the National Consumer Disputes Redressal Commission, which held the banks could not charge pre-payment penalty.

"National Commission has agreed that if a consumer gets a loan at a lower rate of interest, then he can shift. You cannot penalize the consumer for that," Consumer Activist RC Chaudhary.

The SBI refunded the penalty to the Vaids, but has approached the Supreme Court against the consumer forum's verdict.

The Vaids, who are to give their response within a month, are confident the court will decide in their favour.