With the rate of inflation falling analysts are projecting a corresponding drop in rate of interest on retail credit for homes, auto and personal loans to its lowest. The finance ministry, the Reserve Bank of India (RBI) and the Indian Banks Association (IBA) are working out plans to lower interest rates further.

It is expected that low rates of interest would spur demand for housing and other sectors like automobiles. It would also extend support to increasing consumption on declining demand in general.

The rate of interest on home loans was between 9.25 per cent and 12 per cent at the end of September 2008. With a combination of rate cuts by RBI and depressed demand the rate dropped to 8 to 11 per cent. The interest on home loans was 7.75 per cent in 2006. These are floating rates while fixed rates are usually 1-1.5 percentage points on the higher side.

According to the finance ministry, which has done a comparative analysis of loan rates over the last three years, interest rates are already quite low and another 100 to 150 basis points cut would depress the rates to the lowest in the recent past.

Present prevailing prime lending rates (PLR) of most banks are in the range of 11.5 per cent and 12.5 per cent; this was between 10.25 per cent and 11.50 per cent as on April 1, 2006.

The fresh rate cuts would be applicable to existing and the new borrowers, as a PLR cut would warrant a corresponding reduction in rate of interest on loans linked to it.

However, the government's efforts to increase the flow of funds to the housing sector have so far have come to a naught according to analysts. According to finance ministry data, credit growth in the housing sector from 7 November, 2008 to 16 January 2009 was recorded at 2.39 per cent as compared to an average credit growth of nearly 10 per cent to 20 per cent over all quarters prior to September 2008 when the global financial crisis started.

According to analysts even with the slashing of interest rates on home loans by around 3 per cent since October, credit flow from the public sector banks remains sluggish. As on 30 September 2008, home loans were available from PSU banks at 9.25 per cent to 12 per cent. These rates fell to nearly 8.75 per cent to 11 per cent as on 1 December and dropped even lower in January and February; this however, did not lead to credit flow to the housing sector.

At the end of December 2008, PSU banks' total exposure was Rs162,500 crore on housing loans with total exposure of Rs2,71,683 crore of all commercial banks as of 19 December 2008.

RBI, finance ministry and the public sector have been introducing various measures to increase the fund flow to the sector and in December the Indian Banks' Association (IBA) declared a special package for borrowers. The package provided for extension of all home loans up to Rs5 lac at 8.5 per cent and between 5 lac to 20 lac at 9.25 per cent.

Additionally IBA has also relaxed the norms for home loans and the benchmark prime lending rate (BPLR) has been revised downward to 300 basis points by all banks to enable borrowers avail cheaper home loans.

Recently the State Bank of India (SBI) has declared a special home loan scheme at concessional interest rates of 8 per cent for a year. (See: SBI freezes home loan rates at 8 per cent for one year)