SBI may withdraw 8% home, car loan schemes

New Delhi: With the Reserve Bank of India (RBI) signalling the end of a soft interest rate regime, State Bank of India (SBI) plans to withdraw its special home and car loan schemes, carrying an interest rate of 8% for the first year of repayment period. SBI's current special scheme will expire on November 7. A senior SBI official said the bank will take a final view on the matter this week.      Other public sector banks are also considering to withdraw special schemes, announced to revive the loan demand for houses and cars in the first quarter of 2009, when the country was facing one of the worst economic slowdown in the last five years. In an attempt to counter the slowdown, RBI had also announced a number of measures to infuse liquidity, leading to fall in interest rates. The measures helped in containing the slowdown, putting the economy back on revival path. Since inflationary pressure is also mounting, RBI governor D Subbarao, while announcing the second quarter review of monetary policy, said central bank's main focus will be on checking inflation and this may lead to tightening of monetary policy. This gave a signal to bankers that interest rates are likely to go up, prompting them to consider to withdraw offering loans at lower rates under special schemes.      However, the monetary system is still flushed with liquidity. On Tuesday, RBI mopped up around Rs 1.25 lakh crore under liquidity adjustment facility at 3.25% from banks. But the apprehension is RBI may increase the cash reserve ratio —the proportion of deposits that banks need to keep with central bank —by half a percentage points to 5.5%, sooner or later, to mop up extra liquidity from the system.      Bankers argue that the special schemes were launched in February to attract new borrowers to kickstart economic revival. At that time, banks were saddled with old deposits at high interest rates, making overall cost of funds high. If banks had cut the benchmark rates, interest rates on existing loans would have come down, making yield from loan lower than cost of fund. So, to insulate overall yields on loans, banks announced special schemes at lower rates, without cutting the benchmark rate.      But over a period of time, high cost deposits have been repriced at lower rates, bringing down the overall cost of fund. This enabled banks to cut their benchmark rates. When SBI had announced its special schemes in February 2009, its benchmark rate was around 13.25% and it was offering home loan at around 12%. But in the last nine months, the PLR has declined to 11.75% and SBI is now offering home loan at 9.25%-10%.      So, even if special schemes are withdrawn, there would not be much escalation in the overall cost of borrowing, a senior banker said.