With a view to stimulate demand in the industry, public sector banks have announced a low interest rate package for home loans up to Rs20 lakh. The banks will now step up lending at these attractive rates: 8.5% for loans up to Rs 5 lakh and 9.25% for loans above Rs 5 lakh and below Rs 20 lakh.

These rates are applicable to only the new customers of the bank. The scheme will be valid till June 30th and these new rates will remain unchanged for five years. The existing customers have been not passed this benefit of lower interest rates. Currently the average home loan interest rates for most PSU banks lie around 10%.

"The aim is to stimulate new demand and the housing sector is critical to the economy as many other sectors like steel, cement are depended on this sector," said O.P. Bhatt, Chairman of State Bank of India. "Almost 80% of the public sector banks' home loan portfolio is made up of loans up to Rs20 lakh. We expect to disburse home loans in the range of Rs15,000 crore to Rs20,000 crore under this window."

Besides banks have also thrown in other perks such as zero processing fee, free insurance cover, lower margin money and no prepayment penalty.

The margin percentage for this segment of home loans has been reduced to 10-15% from 20-25%. This means that that the borrower can now avail up to 85-90% of the house value as loan. Any further cuts in the interest rates under the scheme will be passed on to the customers.

Indian Banks' Association (IBA) Chairman and Chairman and Managing Director of Bank of India, T. Narayansami said: "The free insurance cover will have an impact of about 25 to 35 basis points on the banks' costs. The cut in interest rates should have an impact of about 2-3 basis points on the banks' margins."

The new home loan package states that interest will not change for the first five year and explaining this rationale, Mr. Narayanasami said, "The common man should have the comfort that his or her EMI will not get affected for the next five years."

These measures were announced at a press conference held by leading PSU Banks including State Bank of India, Bank of India and Union Bank of India. Chairman of SBI, Mr O.P. Bhatt said that all PSU banks will offer the new loan package with immediate effect.