SBI rate cut may trigger war in car loan segment

The country's largest bank, State Bank of India, has slashed auto loan rates and deposit rates while many others including Kotak Mahindra Bank, Bank of Baroda and Deutsche Bank have cut their benchmark base rates.

SBI has reduced its auto loan rate by 75 basis points to 11.25%. The move will force other big lenders in the auto finance business like HDFC Bank and Kotak Mahindra Bank to cut rates. SBI's rate cut will enable borrowers save Rs 40 on every lakh. The equated monthly instalment on a Rs 1 lakh seven-year loan has come down from Rs 1,765 to Rs 1,725. Till now SBI had pegged its auto loans at its rack rate of 12%.

Lenders such as HDFC Bank, Axis Bank and Kotak Mahindra, who had higher rack rates, have been offering better deals through special rates starting around 11.5%."This is a highly interest sensitive market and we will have to review our rates to retain our market share," said an official with a leading private bank.

On Monday Kotak Mahindra Bank and Deutsche Bank brought down their base rates by 25bps and 50bps respectively. "We decided to pass on maximum benefit to our customers in keeping with the spirit of supporting economic revival and as signalled in the recent RBI policy," said Gunit Chadha, CEO, Deutsche Bank India. Meanwhile, Bank of Baroda has said that its base rate will come down by 25 basis points with effect from May 1, 2012 while deposit rates are also being reduced by 25 to 50 basis points across maturities.

The reduction in lending and deposit rates are a fallout of the Reserve Bank of India's decision to signal cheaper funds by reducing its repo rate by 50 basis points in its monetary policy on April 17. The repo rate is the rate at which RBI extends overnight funding to banks to meet their short-term cash requirements . According to rating agency Moody's , the move will improve credit-worthiness of Indian banks and reduce pressure on bad loans.

"The RBI's policy easing and greater access to liquidity are credit-positive because they support banks at a time of increasing asset quality and liquidity pressure," Moody's said. It added that in the short-term the easing will help banks steady borrowing rates and interest margins.

Source: EconomicTimes