Under pressure, big banks trim lending rates at last

By Devidutta Tripathy

MUMBAI (Reuters) - Three of India's largest banks said on Tuesday they would trim lending rates, yielding to months of central bank pressure with the first major cut in borrowing costs since a monetary easing cycle began in January.

The moves came hours after a policy review in which the Reserve Bank of India left rates unchanged but again berated the sector for holding up transmission of changes in monetary policy to the economy. The RBI has cut rates twice this year.

Government-owned State Bank of India, India's largest bank, and number two private sector lender HDFC Bank announced plans to cut their base lending rates by a modest 15 basis points each, to 9.85 percent. ICICI Bank , the biggest private sector lender, will cut its base rate by 25 basis point to 9.75 percent.

More banks are expected to follow market leader SBI, but officials at some industrial firms said the tentative cut was unlikely to be sufficient to help drive economic growth, in a country which already has one of the region's highest costs of capital.

The RBI has cut its policy rate by 50 basis points this year.

"It will be very insignificant," said Issac George, chief financial officer at GVK Power and Infrastructure, whose businesses range from power plants to airports.

Banks have in the past cited lack of liquidity as one reason for their reluctance to reduce lending rates. Some had started cutting deposit rates before Tuesday, seen as a precursor to cutting lending rates.

Banks have also been held back by weak demand for corporate credit, with many projects stalled despite signs that the economy is growing faster after two years of sluggish expansion.

BASE RATE CALCULATION

The RBI proposed on Tuesday that banks should decide lending rates based on their marginal cost of funding, hoping such a shift will persuade them to lower lending rates faster in response to central bank easing.

Detailed guidelines would be released soon, it added. The prospect will be a shock for commercial banks, which have enjoyed a large degree of freedom in setting lending rates, currently ranging between 10 percent to 11.25 percent.

A senior executive at State Bank of India warned a switch to using the marginal cost of funds to determine base lending rates would lead to frequent changes in rates. He recommended using the average cost of funds instead.

"Based on the marginal cost of funding I have to change the base rate, which means 80-85 percent of my advances is going to be changed on the basis of marginal cost of funding which is maybe 1 percent of my deposit," said P. Pradeep Kumar, a managing director at SBI.

(Editing by Clara Ferreira Marques and John Stonestreet)