PSU banks extend special home loans & reduced deposit rates

Country’s largest lender State Bank of India, few days back extended its special schemes and also few other public sector banks have extended their special home loans schemes under which they are offering discounted rates, even though they have reduced returns on fixed deposits. On the other hand private sector banks have raised interest rates on auto loans, ending their festive offers.

SBI controls a fifth of bank loans and deposits, has its special 8% home loan scheme until March 31, 2010. Among others lenders, Bank of India and Punjab National Bank have taken decision of extending their special home loan scheme till December 31, while Union Bank of India has extended its scheme till January 15. Officials of these banks told ET that main behind extension of scheme is to get hold of market share in mortgages.

Bank of Baroda is the only bank among public sector banks to roll back its special home loan scheme from October 31. “We feel the interest rate cycle is set to change,” said an official explaining the bank’s interest rate view.

While the SBI officials said as the scheme has got huge response and there has been floppy demand for corporate loans, looking at these factors the bank has extended the scheme. But the processing fee on loans, which was waived for three months, has been reintroduced.

In mortgages the interest rates on most loans increase along with market rates, whereas auto loans are offered on fixed rates. The private banks like HDFC Bank and Kotak Mahindra the big players of car loan business after SBI, have taken preventive measure against an expected rise in interest rates. Thus HDFC bank has discontinued its festive offer discounts of 50-75 basis points from November 1.

Ashok Khanna, EVP, HDFC Bank pointed out, “There is good demand but interest rates are likely to move up. As such, there is no point in continuing with the discounts”. The bank is offering auto loans at the interest rate of up to 10.25-11.5%. After SBI, HDFC Bank is the second largest player in auto loans and gives around Rs 1,000 crore every month. Kotak Mahindra, another large player, has raised its interest rates by 25 bps from October 25 and will be raising them by another 25 bps from November 9. “Our two-month festive season offer saw strong volumes. The rates have to reflect the reality on the lending side,” said Sumit Bali, CEO, Kotak Mahindra Prime.

Meanwhile, SBI and Punjab National Bank have reduced interest rates on deposits by 25-50 basis points with effect from November 9. After revision in rates SBI will offer marginally lower rates on deposits as compared to its rival PNB. For 1-2 years, SBI is offering 6% while PNB is offering 6.5%. For 2-5 years, SBI has fixed 6.5%. PNB is offering 6.75% for 2-3 years and 7% for 3-5 years.

SBI by reducing rates is discouraging deposits growth, as it is facing a huge liquidity overhang.