Although the rate cut would hit the banks margin by 2 to 3% but it is a short-run phenomenon. In a scenario where bond yields are falling, this margin would be recovered by the extra profits in treasury incomes, said Mr Narayanasami.

Meanwhile it is felt that this move by the public sector banks would pressurize private and foreign lenders who are following a wait-and-watch policy before taking any decision.

Director and Chief Executive of LIC Housing Finance, Mr R.R. Nair, said the move by the PSU banks would pose a business challenge to housing finance companies. "We would look into a revision in our business models and our lending rates."

However ICICI Bank has already announced 150 basis points cut to 11.5% for its new home loan up to Rs 20 lakh.