By Devidutta Tripathy and Suvashree Choudhury
MUMBAI (Reuters) - Indian banks, led by market leader State Bank of India, announced sharp cuts to their lending rates after a recent surge in deposits, raising hopes that lower borrowing costs will help spark credit growth in Asia's third-largest economy.
SBI, the country's biggest lender by assets, said on Sunday it had cut its so-called marginal cost of funds-based lending rates (MCLR) by 90 basis points, while unveiling new products for mortgage loans, one of the fastest-growing areas.
Several other lenders including Punjab National Bank, Union Bank of India, Kotak Mahindra Bank and Dena Bank also cut their lending rates by 45-90 basis points across tenures. Analysts expect more lenders to follow suit.
Banks have received an estimated 14.9 trillion rupees ($219.30 billion) in old 500, and 1,000 rupees notes from depositors since Prime Minister Narendra Modi's government on Nov. 8 unexpectedly banned the banknotes in a bid to fight counterfeiting and bring unaccounted cash to the economy.
That had raised expectations banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments.
Arundhati Bhattacharya, chairman of SBI, said at a news briefing on Monday, the rate cuts were intended to "jump start" credit growth and could raise it by 100-200 bps in the year ending in March.
SBI now expects credit growth for 2016/17 fiscal year to be 8-9 percent, Bhattacharya said, still lower than the lender's previous formal guidance of 10-12 percent growth.
Any signs of a revival in credit could ease some of the worries from Modi's move, which has sparked a severe cash shortage that has paralyzed parts of the economy.
A private survey on Monday showed factory activity plunged into contraction in December as the currency crackdown severely hurt output and demand.
Although India's gross domestic product grew 7.3 percent in the July-September quarter from a year earlier, the fastest pace of growth among large economies, much of that has been led by consumer demand.
Worries that profit margins at banks would be hurt hit the shares on Monday, with SBI falling 2.6 percent.
But lenders took steps to protect their margins. SBI, for example, raised the premium it charges on home loans to 65 basis points above the reduced one-year MCLR of 8 percent, according to details released on Monday.
The rate cuts also come after Prime Minister Narendra Modi on Saturday admonished banks to "keep the poor, the lower middle class, and the middle class at the focus of their activities," and to act with the "public interest" in mind.
Modi's comments were made in a special New Year's eve speech in which he defended his ban on higher-value cash notes and announced a slew of incentives including channeling more credit to the poor and the middle class.
"The combined impact of banks cutting lending rates and subvention provided by the government to small businesses is likely to help turn around growth faster than expected in the next fiscal year," said Saugata Bhattacharya, chief economist at Axis Bank, the third-biggest Indian lender.
(Editing by Jacqueline Wong and Rafael Nam)