Following its earlier move of freezing the home loan rates at 8%, State Bank of India has now frozen the interest rates on auto loans at 10% for a year.

A press release by SBI stated that the bank will freeze the interest rates on new car loans taken between February 23rd and May 31st. However this scheme will be valid for only an year and after the completion of one year, the loan rate will be reset at the "applicable card rate" prevailing at the date of sanction of the loan.

Presently the bank charges interest rates of more than 11.5% on its auto loans. These rates are linked to the benchmark prime lending rate and vary depending on the loan tenure.

"SBI calculates interest on loans on daily outstanding balance, which reduces the interest burden on the borrower as against the monthly outstanding balance basis or the flat rate basis as charged by few others," stated the press release.

The bank aims to disburse 20,000 loans a month under this scheme, said a senior officer at SBI. For the period ended on December 31st 2008, SBI recorded a growth of 32% Rs 8,970 crore in its auto loan portfolio.

SBI officials said that they have taken the move to push up the demand and support the slowing economy. "We expect that consumers will take advantage of the low rate and buy cars. This will help clear the inventory of auto firms and improve their cash flow. They will also be able to clear the dues to their vendors," said a senior SBI executive.

However other banks are not expected to follow the leader immediately. Bank of India Chairman and Managing Director, Mr T S Narayanasami said that other public sector banks would reduce interest rates only if the response from customers was good. "We have to wait and watch the real impact of interest rates on customer demand. If the demand is good, banks would readily reduce rates because it gives better returns compared to putting money in the reverse repo. And for banks which are flush with money, it is a lucrative deployment," he said.

At the same time, the bank has also decided to reduce the interest rate for loans to farmers at 8%. These rates are valid with immediate effect for a period of one year.