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AFTER causing a stir in the home loan market, the State Bank of India (SBI) has once again surprised competitors by slashing interest rates on loans for new cars. The country’s biggest bank has also reduced its lending rate against warehouse receipts for farmers.

SBI will offer new car loans at a fixed rate of 10% for one year, 1.75 percentage points lower than the prevailing rate offered by market leader HDFC Bank. Subsequently, rates will be linked to the bank’s existing prime lending rate (PLR). The borrower will be charged 75 basis points (bps) below PLR for a threeyear loan of Rs 7.5 lakh and above. Loans below Rs 7.5 lakh will carry an interest rate of 50 bps below PLR.

An HDFC Bank official said the bank is not considering a rate cut. Banking circles said the new scheme’s success would depend on how SBI promotes it among auto dealers. The 10% offer happens to be the lowest in the industry as most commercial banks offer car loans in the range of 11.5-13%. Until now, SBI offered new car loans at 11.5-12.5%.

The new auto loan rate announced will be applicable only to new cars. “If a borrower already has a car loan with another bank and applies for a transfer to SBI, it will be deemed as a loan for the used car. Thus, she may not get the benefit of the new rate,” said an SBI official. The 10% auto loan scheme will be available only from February 23-May 31, 2009, and will be applicable for all types of passenger cars.

Last month, SBI decided to freeze interest rates on home loans at 8% for a period of one year. The new home loan rate has generated a lot enquiries but “incrementally, HDFC has not witnessed any major loss of business to SBI so far”, according to an Edelweiss Research report. HDFC, the parent of HDFC Bank, is India’s biggest mortgage lender. “...with respect to existing customers, we believe the likelihood of switching from HDFC to SBI is low considering the prepayment penalty and tedious and timeconsuming process,” said the report.

SBI officials said they expect the new auto loan scheme to generate substantial incremental demand for passenger cars. As of now, SBI’s auto loan portfolio is close to Rs 9,000 crore against HDFC Bank’s Rs 13,000 crore.

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