Finally, SBI and ICICI Bank also reduce interest rates
By Vaibhav Aggarwal
Oct 11, 2007
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New Delhi: A much awaited step from the banking majors has finally materialized. The two giants SBI and ICICI banks have slashed there rates on various retail loans. This move is expected to trigger similar events from other banks.

State Bank of India (SBI) India’s largest public sector bank and biggest lender has reduced its interest rates on home loans, car, farm equipment and truck loans for new customers. This 50 to 200 basis points reduction in interest rates for various retail loans will be effective from October 8 and is extended as a special offer up to December 31st this year. SBI has also announced a reduction in peak deposit rates by 25 basis points to 9 percent.

On the other hand ICICI Bank, the largest private sector lender in India, has reduced its interest rates on floating rate home loans by 50 basis points, with immediate effect. This will bring down the floating interest rate home loan to 11 percent. ICICI Bank has also announced a reduction in interest rates on other retail loans by 25-50 basis points. Unlike SBI, ICICI Bank has not reduced its peak deposit rates.

This reduction in interest rates by ICICI Bank will be reviewed at the end of October, when Reserve Bank of India (RBI) will undertake its quarterly review of the 2007-2008 monetary policy.

These cut in interest rates were announced soon after the top brass of major banks met with automobile industry representatives and the finance minister on October 5. The meeting was organized to tackle the recent slump in demand for retail and other loans due to the recent hikes in interest rates and to decide on ways to improve the gloomy situation. Mr. P. Chidambaram, the Finance minister of India urged the banks to reduce interest rates so that various interest-sensitive sectors of Indian economy do not cripple under the burden of high interest rates.

SBI has slashed its interest rates on home loans by 50 basis points for repayment tenures up to 5 years. A 100 basis point reduction is offered on home loans with tenures over 5 years to 15 years and a 75 basis point cut on new home loans is offered on home loans of 20 year tenures. The table below summarizes the interest rate cut by SBI.

SBI Home Loans Rates5 Years5 -15 Years15-20 Years
Up to Rs 20 lakh10%10.75%10.25%11.25%10.5%11.25%
Over Rs. 25 lakh10.25%11.25%10.5%11.25%10.75%11.25%

ICICI Bank has reduced its home loans interest rate from existing 11.5 percent to 11 percent for all tenures.

A senior SBI official sounded optimistic, “We hope to see a better demand for home loans especially in the 5 year to 15 year category, where the cut is the highest at 100 basis points.”

In addition to the cut in interest rates, SBI is also offering extra discounts to those applicants who have a salary accounts with SBI or to those who are willing to pay more than 20 percent of the loan amount as the margin money.

Housing loans constitute 52.22 percent of SBI’s retail advances as on June 2007. The total outstanding of home loans as at end of June was Rs 39,241 crore. The segment grew by 18.22 percent year-on-year in the first quarter of the fiscal.

For auto loans too, SBI has substantially reduced its interest rates. On a new auto loan of 5 to 7 years, there is a 75 basis points cut in interest rates bringing down the effective rate to 11.50 percent. Car loans of three-five years would now be available at 11.25 percent, as compared to 12 percent earlier.

On an auto loan of amount over Rs 7.5 lakh and tenures up to three years, the interest rates have been reduced by 50 basis points to 11 percent . And, auto loans loans less than Rs 7.5 lakh for the same period will now be available at 11.25 percent.

Personal loans interest rates have also been reduced by SBI from 0.50 to 1 percentage point. A 50 percent discount is also being offered on processing fees on personal loans.

The reduction in trucks and farm mechanization equipment loans interest rates has been much sharper and these will now come at an interest rates up to 200 basis points lower than earlier rates.

SBI considers this reduction as a festival offer open only until Dec 31. According to bank officials, rates on retail loans are intended to boost demand during the festive season. K Seetharaman, DMD - Retail banking, SBI said, “Normally every year, due to the credit policy, we do give some concessions to our customers. This year also, we have done the same.”

This move was expected as the current slowdown in retail loans has affected almost every bank in the country. Earlier, many banks like the HDFC Ltd, Bank of Baroda, IDBI Ltd, Union Bank, Canara Bank, Axis Bank, Allahabad Bank and Dena Bank had slashed their interest rates. Now the major players too joining the party, it looks like this festive season will bring more cheers to the life of a loan seeker.

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