Under a special scheme, State Bank of India, the largest lender in the country has reduced the interest rate on auto loans to 8 percent, applicable for the first year and at 10 percent for subsequent two years. For the remaining tenure, the interest would be charged 25 to 75 basis points below the BPLR.

The new scheme will be effective July 1 onwards and will valid till September 2009. July 1 marks the foundation day of the bank.

The offer will come as an immediate benefit for the Nano applicants.

Under this offer, EMI on an auto loan of Rs 1 lakh will be Rs 1,559 for the first year, Rs 1,647 in the consecutive two years. In the fourth year, the rate of interest applicable will be 50 basis points lower than the bank's PLR prevailing at that time.

Presently, the bank is offering auto loans at 25-75 bps below its BPLR, which is 11.75 percent.

With this reduction, it is expected that other banks like ICICI and HDFC will follow the suit. Sumit Bali, CEO, Kotak Prime, said, "We have reduced our loan rates by 30-40 basis points to around 11.25%. If there is a policy action which results in lowering of our interest costs, we will pass it on to the customers."

Earlier, in February this year, SBI introduced a similar scheme where the interest rate applicable was fixed at 10 percent for the first year. Under this scheme, the bank disbursed loans worth Rs. 1,200 crores. The bank had also waived the processing fee on car loans, besides providing free accident insurance cover of up to Rs 40 lakh on loan outstandings.