In a move that may trigger a rate war, State Bank of India [Get Quote] on Sunday said it would charge 8 per cent interest on new loans for home buyers and small and medium enterprises for a year. The loans disbursed till the end of April will be eligible for this rate.

Through the scheme, SBI will offer a discount of up to 425 basis points over the prevailing rates under various packages for a year.

As part of the package from public sector banks, announced last month, SBI was offering new home loans up to Rs 500,000 at 8.5 per cent, while it was charging 9.25 per cent for those between Rs 500,000 and Rs 20 lakh (Rs 2 million). Outside the package, for loans above Rs 20 lakh, the minimum interest rate charged was 9.75 per cent under the floating rate scheme, while under the fixed rate scheme the rate on offer was between 11.25 and 12.25 per cent.

In the case of existing borrowers, while rates have not been lowered, SBI has launched a new scheme under which it will sanction up to Rs 500,000 at 8 per cent.

Indications are that other banks, especially in the public sector, will also launch special schemes for segments such as home loans. A banker said public sector banks will be forced to lower interest rates on home loans up to Rs 20 lakh as the scheme announced last month provided that banks would have to match the lowest rate on offer.

Earlier this month, HDFC [Get Quote], the country's largest mortgage player, introduced a special offer of a discount of up to 150 basis points for loans between Rs 20 lakh and Rs 30 lakh. Above Rs 30 lakh, the discount is 50 basis points.

Asked if HDFC would cut rates further, the company's vice-chairman and managing director Keki Mistry said: "Our lending rates are a function of the cost of funds and we do not see it coming down right now. As soon as the cost of funds comes down, we will examine a further rate cut."

Punjab National Bank [Get Quote] announced a 50-basis-point reduction in its benchmark prime lending rate to 11.50 per cent. Following the move, interest rate on home loans and other products will fall from Monday.

SBI's package comes ahead of Finance Minister Pranab Mukherjee's meeting with public sector bank chiefs on Monday. Earlier this week, the Reserve Bank of India had exhorted lenders to reduce interest rates further.

A rival termed the SBI move as a "marketing gimmick". A foreign lender had announced a similar strategy in 2002-03 when it charged 6 per cent in the first year of the loan and 7 per cent in the second year, but raised the rate from the third year onwards. Many borrowers shifted to other lenders after the second year and the bank shut down the home loan business, a lender pointed out.

SBI also announced a package for small and medium enterprises, under which additional working capital facility of 20 per cent of the fund-based limits will be given to take care of raw material inventories, finished goods and delayed payments from buyers.

SMEs will also be offered a term loan product to purchase fixed assets, including generator sets at the concessional rate of 8 per cent in the first year.