State Bank of India [Get Quote], India's largest lender, on Thursday slashed interest rates on working capital loans to micro, small and medium enterprises by 0.5-1 per cent effective from December 16.

The rate cut came shortly after state-owned banks slashed interest rates for home loans below Rs 20 lakh (Rs 2 million) and loans for small companies to spur demand.

"With this reduction, the micro enterprises will be able to avail working capital finance at as low as 10.25 per cent," State Bank said.

The reduction in rates will be applicable for small firms with working capital limits up to Rs 10 crore (Rs 100 million), the bank said. SBI also introduced a new product for small firms -- SME Care -- to help the companies avail additional working capital limits up to 20 per cent over the earlier limits, to meet the longer working capital cycle, the bank said.

Besides, the SBI also launched a special scheme to support MSMEs that require diesel generator sets to meet power shortage and maintain their productivity.

State Bank's MSME loan portfolio went up to Rs 81,794 crore (Rs 817.94 billion) as at end-November, as compared to Rs 74,324 crore (Rs 743.24 billion) as at end March, 2008, the bank said.