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The State Bank of India (SBI) has recently turned down the interest rates on car and home loans to 7.90% from 8.15% for loans up to `30 lakh. For similar loans of `30 lakh to `75 lakh, the interest rate is now 8.20% as compared to 8.45% previously and for loans in the same category of above `75 lakh, the interest rate has been pulled down to 8.30% from the earlier 8.55%. The new rates are the lowest in the last ten years.

The government bank stated in a press release, “With this reduction, the interest rates for existing home loan customers as well as Micro, Small and Medium Enterprises (MSME) borrowers who have availed loans linked to the external benchmark based rate would come down by 25 basis points.” The new rate has been implemented nationwide from January 1, 2020. The SBI, which has a large market share of 25% in car and housing loans each, is expected to provide a decisive push to these sectors through this reduction of interest rates.

Possible impacts

Since 2007, the overall real estate sector, especially the housing sector (as against the commercial real estate sector) has shown a consistent slowdown. The automobile market in India is also lacking its usual pace.

The current economic slowdown leading to unemployment, layoff and low wages has impacted the real estate and automobile sectors and the demand of these two sectors has seen a decisive decline. The predominant trend of the market is towards saving, as the market seems to be in an apprehensive mode and continue to remain distant from splurges in real estate and automobile sectors. Now the question is that, can SBI’s decade low interest rates for home and car loans actually provide a fillip to these sectors?

Under the current market conditions, it is unlikely that this revision of interest rates will provide any decisive impetus to the market as a whole. However, this step can push sales of the semi luxury and luxury cars and also provide some impetus to the stranded luxury real estate market. Typically, the price range for the luxury real estate offerings starts from `1 crore to `1.2 crore and goes higher. The repayment tenure for this segment is also longer as compared to the affordable segment. Under the revised interest rates, the buyers will be able to save significantly more (in the range of a few lakhs) and this can provide a boost for the segment.

Ranjan Kumar Mishra, CGM, ILO, SBI, informed BE, “The RBI is bringing down the repo rate. SBI has already linked the interest rates with the external benchmark which is the repo rate. So when the repo rate changes, we keep changing our interest rates. Also many people were holding their purchasing decisions, expecting the interest rates to drop. Now when the EMI is finally coming down, they will be able to opt for the held up real estate purchases. The same mechanism is expected to replicate for the automobile sector.”

After the SBI initiated this move, other private banks are also expected to turn their interest rates down. This might provide much needed fluidity in the market.