ICICI Bank reduces base rate; others expected to follow

Days after the government urged banks to cut interest rates in line with the apex bank's earlier monetary policy easing, the country's leading private sector lender ICICI Bank on Thursday announced a reduction of 0.05 percent in its base rate.

According to the bank, the reduction in the "ICICI Bank Base Rate" (I-Base) will come into effect from Friday June 26.

"The revised rate will be 9.70 percent per annum as against 9.75 percent at present. With effect from July 1, 2010, interest rates on new loans and advances, including consumer loans, are determined with reference to I-Base," the bank was quoted in statement.

During April major lending firms had reduced home loan rates after the Reserve Bank of India (RBI) had asked them to transmit the benefit of past policy rate-cuts to consumers.

The reserve bank and the government are concerned that the three repurchase rate cuts in January, March and June have not been transmitted by banks to consumers.

The RBI has reduced the repo rate, at which it lends to commercial banks, by 0.75 percent in three trenches.

The repurchase rate is the interest commercial banks pay for borrowing money from the central bank to meet short-term fund requirements. The reverse repurchase rate is the interest central bank pays when surplus short-term funds are parked with it by commercial banks.

Currently, the repurchase rate and reserve repurchase rate have been maintained at 7.5 percent and 6.5 percent respectively.

Commercial banks have been reluctant to lower their base rates, or minimum lending rates, citing high cost of deposits.

Another major reason for banks' reluctance stems from the fact that most of them are burdened by enormous non-performing assets (NPAs) in the form of bad loans to finance infrastructure projects.

On June 12, Finance Minister Arun Jaitley meet with bank chiefs and discussed the transmission of rate cuts by the lenders.

Jaitley expressed hope that banks will be able to further lower lending rates following a series of rate cuts

State Bank of India (SBI) has lowered its base rate by 30 basis points this year, it's base rate stands at 9.70 percent.