HDFC [Get Quote], the largest mortgage lender, has taken the lead in cutting home loan rates. HDFC has cut its retail prime lending rate by 25 basis points to 13.75 per cent from Friday.

While its 800,000 existing borrowers will see a 25 basis points reduction in their floating interest rates, new customers will continue to pay 10.25 per cent.

Renu Sud Karnad, joint managing director, HDFC, said, "We have been able to bring down our costs due to improved operational efficiency and good quality portfolio."

Since June 2007, the housing finance company has been offering fresh home loans at 300-350 basis points lower than the RPLR, which was at 14 per cent.

Since January 1, 2008, the company was giving new mortgage loans at 10.25 per cent, which is 375 basis points lower than the RPLR.

"The advantage of a cut in RPLR will accrue to all the existing floating rate customers over the period of next three months based on their respective reset dates, while for the new home loan customers, the rate continues to be at 10.25 per cent," said HDFC.

HDFC's loan book grew 25 per cent to Rs 68,151 crore (Rs 681.51 billion)at the end of December 2007, from Rs 54,633 crore (Rs 546.33 billion) a year earlier.

In its third quarter review of monetary policy statement, the Reserve Bank of India, observed that contrary to the comfortable liquidity situation, banks have not cut lending and deposit rates, which are at the elevated levels of the previous year.

A senior SBI [Get Quote] official said the asset-liability committee of the bank would review the (lending) rates keeping in mind the cost implications and market trends.

V Vaidyanathan, executive director, ICICI Bank [Get Quote], said, "We are studying our cost of funds. There was no reduction in interest rates in RBI's policy but we are watching (the situation)."

However, SBI has already extended its limited period festival offer offering up to 50-200 basis points lower interest rates to new borrowers on home, car, truck and farm equipment loans till February 16, 2008.

The growth in credit offtake, led by a slowdown in retail lending, has come down to 22.4 per cent year-on-year for the fortnight-ended January 18, 2008, from a compounded growth of close to 30 per cent in the preceding three years.

Despite being flush with liquidity, banks, instead of deploying the funds to lend, were parking surplus funds in government bonds, money market mutual funds and with the RBI under its reverse repo window, in spite of earning lower interest rates.

Banks place funds with RBI against government securities at 6 per cent through reverse repo auction.