TNN

New Delhi, Dec 9: Taking a cue from the RBI's rate cut, banks have started cutting their lending rates. On Monday, public sector bank Union Bank of India cut its prime lending rate (PLR) by 0.75 percentage points to 12.5% and the second largest private sector bank HDFC Bank by 0.50 percentage points.

On Saturday, RBI cut both the repo rate the rate at which it lends short-term fund to banks, and reverse repo rate the interest rate paid by RBI to banks for parking their short term funds with RBI, by one percentage points each to 6.5% and 5% respectively.

The RBI's decisions led to lowering of the interest rates bench mark by around one percentage point. The interest rate on 10-year government bond has fallen by over one percentage point to 5.57%. This clearly indicated an easy liquidity condition in the market.

On Monday, banks deposited around Rs 27,000 crore with RBI under reverse repo operation at 5% interest rate. On top of this, RBI has decided to release another Rs 10,000 crore in the system by buying back the market stabilization bonds from banks, which were issued earlier. These measures will put further downward pressure on interest rate.

A senior bank official said that under the present circumstances, more and more banks will cut their lending rates.

The cut by HDFC Bank will be effective in two tranches of 25 basis points each, the first from December 15, 2008 and the second from January 1, 2009 to 16%

Commenting on the development, executive director of HDFC Bank Paresh Sukthankar said, the drop in the PLR is pursuant to the reduction in the Bank's incremental cost of funds and the significant easing seen recently in the monetary stands and the local currency money markets.

However, the cut in the HDFC Bank's PLR will not affect the home loan rate of the bank. In fact, HDFC Bank markets the home loan product of HDFC Ltd, which is yet to decide on the rate cut.

Union Bank in a statement said the bank has effected the cut "in order to ensure credit to productive sectors at lower rates for sustaining growth momentum." The cut in PLR will be applicable to both the existing and new customers of the bank and also to all PLR related portfolios. That means, it will lead to lowering in the interest rate of its home loan product also. With this, Union Bank cut its lending rate by 1.5 percentage points in the last one month. In November also, the bank had cut its PLR by 0.75 percentage point.