The leading banks, State Bank of India, ICICI Bank and HDFC Bank, on Tuesday announced cut in their lending rates. While SBI and HDFC Bank cut rates by a token 0.15 per cent, ICICI Bank slashed its lending rate by 0.25 per cent after the central bank maintained status quo on policy rate but termed as "nonsense" lenders' claim that cost of funds was still high.
The action of the two banks could have a snowballing effect forcing others to follow suit, a move that can bring relief to corporate and retail borrowers including of home and auto loans.
The lowering of the base lending rate the banks was announced hours after a war of words erupted between RBI Governor Raghuram Rajan and the top bankers, who had appeared reluctant to effect a cut.
After two cuts in three months, the RBI kept the repo rate, at which the central bank lends to banks, unchanged at 7.5 per cent on fears of unseasonal rains impacting food prices.
The cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said.
After his announcement and plain-speaking, leading bankers including SBI Chairman Arundhati Bhattacharya initially maintained that it takes time to lower the lending rates, which could happen in two or three months.
Hours later, SBI took the lead in effecting the rate cut, followed soon by HDFC Bank, whose CEO Aditya Puri had also hinted earlier in the day that it would take some time for rates to be cut by the lenders.