The country's largest lender, the State Bank of India, announced a special interest rate scheme for auto loans, dropping interest rate for car loans to 8 per cent for the first year and 10 per cent for the next two years.

For the remaining period, the interest rate would be about 25 to 75 basis points below the PLR of bank. The move will not only encourage others lenders - such as Axis, ICICI and HDFC bank - to cut auto loan rates, but also besides propel demand in the recession-hit auto sector.

The new scheme will start from the foundation day of bank on July 1 and close on September 2009, benefiting customers who want to avail loan for purchasing cars, especially the recently-launched Tata Nano. Customers are required to pay EMI of Rs 1,559 in the first year and Rs 1,647 in the second and third year for loan up to Rs 1 lakh.

The bank has already sectioned loans worth Rs 1200 crore under a special interest rate scheme at 10 per cent announced in February this year.

Sumit Bali, CEO, Kotak Prime, said: "We have reduced our loan rates by 30-40 basis points to around 11.25%. If there is a policy action which results in lowering of our interest costs, we will pass it on to the customers."