Executives at SBI said that the country's largest lender has reduced interest rates for one-year bulk deposits by 50 basis points to 7 per cent to lower its cost of funds.

A senior SBI executive pointed out that the bank has a lot of liquidity, even as credit demand remains low which reduces the pressure to raise funds at any rate. Another executive said that the revision in lending and term deposits could happen at the end of the month after reviewing market conditions and making an assessment for the next financial year.

SBI had last reduced its prime lending rate in January by 75 basis points to 12.25 per cent, while it cut deposit rates by 40-50 basis points across maturities from March this year.

However, BoI customers will get the benefit of the reduced rate only in the next financial year as the new rates are effective from April 1, 2009.

Last week, Bank of Baroda [Get Quote] (BoB) and Union Bank of India [Get Quote] had cut their BPLRs by 50 basis points to 12 per cent after the Reserve Bank of India (RBI) cut its key interest rates on March 4. While reducing repo and reverse repo rate by 50 basis points each, the central bank said that its action will further encourage banks to provide credit for productive purposes at viable interest rates. It also assured that it will continue to maintain ample liquidity in the system. 

Referring to the cut, Bank of India chairman and managing director T S Narayanasami said that the lending rates have been revised downward in response to the cut in repo rate by the RBI.

"Looking at the sharp fall in inflation, interest rates should come down further to protect quality of assets. But the high fiscal deficit and the government's huge borrowing programme are keeping yields on government securities at elevated levels. This limits the scope for downward revision in rates. Ideally, one-year deposits should be at the 6-6.5 per cent level and lending rates should decline by 2 per cent", he added.

Asked about the credit offtake in the fourth quarter of 2008-09, the BoI chief said that only the corporate sector has seen some growth. For the small and medium-sized enterprises, and even agriculture, the credit growth is relatively low.

According to RBI, while some public sector and private sector banks have cut lending rates in response to its monetary policy stance, concerns over rising credit risk � along with the slowing of economic activity � appear to have moderated credit growth.

"The banking sector will face pressure on net interest income, margins and rising risks of bad loans in the fourth quarter. Payments to companies have been delayed, creating cash flow problems, and this has implications for repaying loan instalments to banks," said a head of another large public sector bank.

On March 4, RBI had also asked banks to monitor their loan portfolio.