"The incremental cost of funds has come down over the last one month, and bankers have indicated that existing credit lines would be re-priced at sub-10 per cent levels next month," said the head of a large housing finance company.

Bankers attributed this cut to the lower cost of funds subsequent to the recent reductions in lending and deposit rates.

"Short-term loans are getting repriced at lower rates for two reasons. First, prime lending rates have come down. Second, the system now has a lot more liquidity, so it is better to lend at lower rates instead of keeping the funds idle or parking them through the reverse repo route at 3.5 per cent," said Bank of India [Get Quote] Chairman and Managing Director T S Narayanasami.

Even private and foreign banks are lowering interest rates, but mainly for large corporates. The India head of a foreign bank said that rates have been lowered by around 150 basis points on a case-by-case basis over the last four to six weeks. Bankers also indicated that the flow of credit to the corporate sector has been improving as the risk perception about some sectors is changing.

"There are certain sectors where things are looking up. For instance, the demand for home loans is slowly picking up as real estate developers have started reducing prices. With the demand side improving, we are re-pricing existing lines of credit as well. Similarly, some sectors like textile, gems and jewellery are still under stress. So, in their case, interest rates are still on the higher side," said a source at a Mumbai-based public sector bank.

Additionally, public sector banks are increasingly lending loans to even new corporate customers who are approaching them for working capital loans. Many of these borrowers had shifted to private or foreign banks but, due to tight lending norms, are returning to the public sector fold.

"During October, we were very cautious while lending to new borrowers and concentrated on supporting the needs of existing customers. But this is an excellent opportunity to grab some new customers and be a part of their consortium of banks," said an executive at another public sector bank.

Since October, a series of steps have been taken by the Reserve Bank of India (RBI), which resulted in the cash reserve ratio and the repo rate being reduced by 400 basis points to enhance liquidity in the system. Similarly, to make it unattractive for banks to park surplus cash with RBI, the reverse repo rate was also pared.

In response, public sector banks reduced their benchmark prime lending rates and deposit rates by 150-175 basis points and 300-400 basis points, respectively.

"This has brought down the cost of funds to the banking sector, which they are now slowly passing onto different sectors of the economy," said an analyst with a rating agency.

Besides this 400-basis point cut in cash reserve ratio which released Rs 1,60,000 crore into the system, a moderation in credit demand also brought lending rates down.

Banks have to meet their annual business growth targets and, during closing months, there is a need to attract clients, at times by undercutting competing banks.