Mumbai, Dec 15 (IANS) State-run commercial banks Monday reduced their interest rates on fresh home loans up to Rs.2 million (Rs.20 lakh/$40,000) with several other benefits like nil processing fee and free life insurance.These banks also said interest rates on advances taken by micro, small and medium enterprises stood reduced by 100 basis points.

Home loans of up to Rs.500,000 will invite an interest rate of 8.5 percent and those up to Rs.2 million will attract an interest rate of 9.25 percent, State Bank of India (SBI) chairman O.P. Bhatt told a press conference here.

The incentives, a part of the fiscal stimulus package unveiled by the government Dec 7, will be available till June 30, 2009, he said, and added that there will also be a interest freeze of five years on the borrowings.

Free or floating interest rates will be applicable only after the five-year lock-in. Another attraction in the package is a margin money of just 10 percent fort loans up to Rs.500,000 and 15 percent for up to Rs.2 million.

But industry reactions were divided on the package announced Monday, even as existing borrowers, already reeling under high interest rates, expressed unhappiness that the measures were restricted to fresh disbursals.

“Property prices are very high not only in metros like Delhi but also the small places. Restricting the package at Rs.20 lakh does not make any sense to me,” said Pawan Bansal, who works for a technology company in Noida on the outskirts of the national capital.

“When I took a loan for my house - it cost me Rs.16 lakh, the interest rate was eight percent. Now it is 14 percent. Also, the EMI was for 20 years and now it is 35 years,” lamented Sanjay Sharma, who is with a media organisation here.

“So what I understand is new interest rates will bring no relief to me.”

Similarly, one section of the industry termed the package inadequate, saying banks must extend housing loans at 6 percent for principals up to Rs.3 million and at 8.5 percent for all amounts above that. Others welcomed the proposals.

“This move will create required growth momentum in real estate, construction, cement, steel, electrical and heavy engineering which is the need of hour,” said a statement by the Associated Chambers of Commerce and Industry (Assocham).

Assocham president Sajjan Jindal further said the existing interest rates do not make much sense as properties were hardly available at the costs specified - not even in the tier-II and tier-III cities, than to talk of metros and large townships.

But the Confederation of Indian Industry (CII) said the package comes at the right time as it could provide the much-needed support to two sectors - housing and small and medium enterprises.

The chamber said low-cost housing has a tremendous multiplier effect on the economy and the decision by state-run banks to cut interest rates will, accordingly, imply that overall demand would get a boost.

“This would naturally help the real estate sector as demand picks up, and this is really needed since the sector has been reeling under the impact of the economic slowdown.”

Expressing similar sentiments, the PHD chamber said the package should have been extended to existing borrowers as well and interest sops also given to loans above Rs.2 million so as to boost housing projects in Tier-I cities.

The chamber said taking into account the official estimates of housing shortage at 25 million units, the government must also address issues like availability of finance, high cost of credit, time taken for environment clearances and high transaction costs.