State Bank of India's [Get Quote] decision to freeze home loan interest rates at 8 per cent for a year has stirred a controversy with the country's largest mortgage player HDFC [Get Quote] on Tuesday terming the move as a 'gimmick'.

SBI executives retorted by saying that the package was not a 'teaser rate', as HDFC chairman Deepak Parekh described the move.

"It is aimed at kick-starting the demand across the value chain and in the process, building our home loan portfolio," a senior executive at the public sector bank said.

Parekh told a television channel that by cutting rates, SBI is trying to eat into their pie of the home loan market. "SBI is not trying to get any new money or loans in the housing finance market but is only trying to get existing customers," he said.

A senior SBI executive said it was for the borrowers to judge if it made sense. The executive pointed out that for a home loan of above Rs 20 lakhs (Rs 2 million), the rate is around 12 per cent, while SBI is offering loans for a year at 8 per cent.

This translates into a saving of around Rs 4,000 per lakh over a 12-month period.

"We have already received around 10,000 applications, some of which are from existing borrowers of other banks. The target is to disburse Rs 4,500-5,000 crore (Rs 45-50 billion) by end of March," the source said.

While HDFC was the first to start a limited-period scheme with a discount of at least 50 basis points, SBI decided to launch a scheme through which a discount of up to 400 basis points was offered. Under the SBI scheme, interest rates will be frozen at 8 per cent for a year for home loans disbursed by the end of March.

After that, the interest rates will revert to those under specific slabs. But with the offer, SBI's loans are up to 275 basis points cheaper than HDFC's.

Executives at HDFC said there have not been too many cases of borrowers shifting to SBI though there have been queries to that effect.

SBI's offer has prompted other public sector players to lower interest rates with Central Bank of India being the latest. The bank today said that it would freeze rates on home loans up to Rs 500,000 at 8 per cent for a year.

Over the last two years, while the major players in the mortgage business such as ICICI Bank [Get Quote] have slowed lending, SBI has stepped up activity. 

At the end of December 2008, SBI's home loan portfolio was estimated to have increased by 21.56 per cent to Rs 52,062 crore (Rs 520.62 billion), as against Rs 42,827 crore (Rs 428.27 billion) at the end of December 2007. SBI said its market share rose from 17.25 per cent to 18 per cent during the period.

HDFC said its disbursements rose 22 per cent to Rs 27,211 crore (Rs 272.11 billion) during the nine month period ended December 2008. The housing finance company's total mortgage loan assets were estimated at Rs 82,896 crore (Rs 828.96 billion) at the end of December.