Corrective Services NSW will close a Parramatta centre for women with mental health or drug and alcohol problems to save money, leaked correspondence shows.

The Biyani residential centre will be shut - despite a review finding it had diverted women from prison and prevented homelessness - because it costs $1 million a year to run, a memo from Corrective Services Commissioner Peter Severin says.

Labor's justice spokesman, Paul Lynch, has accused the government of ''privatisation by stealth'', with Corrective Services instead planning to outsource the service.

Jane Sanders, principal solicitor at the Shopfront Youth Legal Centre, said the closure of Biyani was ''a shame''. Several of the centre's clients had been diverted from prison to Biyani and found it ''enormously beneficial''.

''It's not as costly as holding them in prison,'' she said. ''It really helped women deal with the underlying issues.''