The State Bank of India (SBI) may have set the proverbial cat among the pigeons and laid the stage for un-freezing the credit markets with its audacious recent decisions to lower interest rates on car and home loans, and working capital loans to micro, small and medium enterprises (MSMEs).
Early this month, it decided to offer loans to home and MSME borrowers, irrespective of the amount, at 8% for a period of one year. And now it has announced that it will offer for a year, new car loans at 10% and loans to farmers against cold storage and warehouse receipts at 8%. All these loans will be re-calibrated by linking to the existing Prime Lending Rates (PLR) after the first year.
The rate cuts may have the desired effect for two reasons - SBI is too big a player and the size of the cuts too large for it to not influence the market. The rate cuts have opened up a large differential between the rates offered by SBI and its nearest competitors in all the four sectors. If this decision draws in consumers, it could play a substantial roile in reviving demand in important sectors like construction and automobiles. In many ways, it offers more potential for raising aggregate demand than any fiscal stimulus measure till date!
Don't be surprised if a few months down the line, analysts will look back at this decision as that which kick-started the credit markets!