SBI offers auto loans at 10% for a year

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. After one year, 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 three-year 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 the SBI promotes it among auto dealers. The 10% offer is the lowest in the industry, with most commercial banks offering car loans in the 11.5-13% range. Up until now, SBI offered new car loans at 11.5-12.5%. The new auto loan rate announced on Friday will be applicable only for new cars. “If a borrower already has a car loan with another bank, and if she applies to the 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 to May 31, 2009 and will be applicable for all types for passenger cars. Last month, the bank decided to freeze interest rates on home loans at 8% for 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 released on Friday. 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 the SBI is low, considering the prepayment penalty, tedious and time-consuming 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 outstandings of 13,000 crore. According to the Society of Indian Automobile Manufacturers, overall automobile production in January 2009 fell by 11.92% over the same month last year. They were, however, more than December 2008. However, January sales are generally more than December sales as customers wait for new models in January, which fetch a better value in the used car market, according to the SIAM website. The cumulative production data for April 2008-January 2009 shows growth of 2.32% over April 2007-January 2008. However, with lower prices and huge discounts, though January 2009 sales registered more than December 2008 sales, they were not enough to make the year-on-year growth positive.