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SBI declares war wants to capture pole position in home loan race

State Bank of India seems to be racing ahead, leading the competitive race of the banks.

Harsh Roongta

21 Jul 2009

The home loan war seems to be hotting up.  The private sector players (HDFC, ICICI, Axis, LIC housing Finance) are all providing loans at around 9.25% floating to their new consumers (including to existing borrowers of other banks wishing to shift their loans). For once the PSU banks seem to be using attractive structured offerings to provide stiff competition to the private lenders. 

Suddenly the PSU banks are raining offers on the home loan consumers (including long suffering existing consumers of other banks).  The Canara bank offer of completely fixed rates for the next 5 years (see http://blog.apnapaisa.com/2009/06/23/canara-bank-new-home-loan-scheme-does-it-make-sense/) was quite popular and SBI has also come out with a good offer.  

The details are given below for loans upto Rs. 30 lacs:

8% fixed for 1st year, 9% fixed for 2nd and 3rd year and the consumer can decide today between a floating rate thereafter at 2% below SBAR prevalent at that time (current SBAR is 11.75% so if SBAR remains the same the rate will be 9.75% after 3 years but actual rate will be known only at that time) or a fixed rate after 3 years for the 4th and 5th year at 1% below SBAR prevalent at that time (so if SBAR remains constant for 3 years then the fixed rate after 3 years will be 10.75% but actual fixed rate for 4th and 5th year will be known only then) . There are no processing charges and no pre-payment charge if the pre-payment is made from your own sources.

Sources within HDFC have correctly pointed out that if you take the average rate (assuming that the rate from 4th year onwards will be 9.75% floating) then it works out to 9.35% for SBI versus 9.25% for them. However given the uncertainty surrounding interest rates and more importantly the tendency of all lenders (contrary to popular opinion the PSU banks also have a similar behaviour pattern) not to pass on the benefit of reduction in interest rates to their existing floating rate customers, it is always safe to go for fixed rates as long as they are economically priced and even if only for a few years.

It is here that the SBI plan scores over the other lenders who lend only on "floating rate" basis. Personally I would still rate the Canara Bank scheme higher than SBI as it provides for a fixed rate for 5 years with other charges that are the same as SBI.

The mighty sales machinery of SBI is already in full flow and their local level managers seem keen to do business for once. Let us see how the consumers re-act to this new scheme. After the entire consumer is supreme.


SBI car loan Scheme

The car loan scheme from SBI is a really good. As an example its 5-year new car loan scheme has a fixed rate of interest for the first 3 years (8% for 1st year and 10% for the next 2 years) and at 0.50% below SBAR for the 4th and 5th year (if the SBAR stays at the current levels it will be at an effective rate of 11.25%). Processing fee is nil till September 30, 2009 and the prepayment charges are at 2 % (plus applicable service tax). This compares very favourably with the 5 year fixed rate schemes available from the private sector lenders at around 12% as also their slightly cheaper floating rate option. It also has an option for an overdraft loan facility if you are taking a loan for an amount exceeding Rs. 3 lacs, though this is at a slightly higher rate. Its used car scheme is again one of the best available in the market in terms of rates. The only missing thing is that for this loan you will need to apply separately to SBI unlike the private sector banks where the car dealer himself takes care of the loan sanction from the bank. This is a product (unlike home loans) for which the consumer is not used to dealing with the bank directly and hence the convenience that the car dealer offers of getting the loan sanctioned and disbursed often make customers opt for the private sector lender even though the SBI product is clearly better.