Banks hint at lower lending rates after RBI's second prod

By Suvashree Choudhury and Devidutta Tripathy

MUMBAI (Reuters) - Banks hinted they could cut lending rates as early as next month, after a second interest rate cut in two months heaped pressure on lenders that have largely kept rates unchanged, citing weak credit demand and a lack of liquidity.

On Wednesday, the Reserve Bank of India lowered its policy repo rate by 25 basis points to 7.50 percent.

Speaking after the move, RBI Governor Raghuram Rajan said he was confident the move would persuade banks to reduce their lending rates this time.

"March is typically a time when banks try and hoard liquidity, but as we move into the new fiscal year we will see more transmission of lower interest rates," Rajan said.

After the RBI cut rates in January, only three banks of 45 Indian commercial banks cut lending rates, the result of an uncompetitive banking sector plagued by bad loans and dominated by state-owned lenders, as well as underdeveloped capital markets.

Most, however, moved to cut deposit rates.

Rajan said the RBI was studying whether there were "institutional constraints" holding banks back from lowering lending rates.

Banks' failure to pass on lower rates has been a major headache for the RBI, which has attacked 'lazy' banking.

Banks questioned by Reuters on Wednesday said they remained cautious, but added they would review rates when the new financial year begins in April, with several acknowledging increasing pressure from both businesses and the RBI.

India's largest lender, SBI, said slowing inflation "will aid banks in their decision making", and said it would now look at "all evolving circumstances".

"It will be passed on," said Sushil Muhnot, chairman and managing director at Bank of Maharashtra, adding that lower official rates would result in lower lending rates.

"Maybe in the beginning of the next financial year. This is the end of the financial year, so we may not like to tinker with all the rates, but it will be definitely passed on," he said.

But bankers remained cautious, awaiting a drop in the cost of funds that will allow them to protect margins.

"My base rate is a function of cost of funds. Unless the cost of funds comes down, I cannot reduce the base rate," said CVR Rajendran, chairman and managing director at state-run Andhra Bank.

India's businesses said they would continue to push a reduction in borrowing costs that are among the highest in Asia, encouraged by expectations that the RBI would cut further.

"I think there has to be a cumulative 1 percent rate cut, then only it will have a meaningful impact on the balance sheet of business houses," A. Issac George, Chief Financial Officer, GVK Power & Infrastructure Ltd , said.

Three-month wholesale corporate deposit rates, known as certificate of deposits, have stayed nearly flat in 8.50-8.75 percent range since January.

Indian banks' credit growth was 10.4 percent year-on-year in early February, near decade lows, as high costs, among other factors, deterred businesses and consumers from borrowing, hampering the government's efforts to revitalise the economy.

(Editing by Clara Ferreira Marques and Simon Cameron-Moore)