Mumbai: Public sector banks have agreed to cut lending rates by up to 0.75 per cent, finance minister P Chidambaram said after a meeting with heads of banks and RBI officials to review performance of banks and assess the liquidity situation.

The government is also planning to extend credit guarantee on loans up to Rs1 crore, he said.

''IBA (Indian Banks Association) has assured that it will reflect on the matter (demand for rate cuts)," Chidambaram said, adding, that the finance ministry has also called a meeting of private and foreign banks to discuss the issue.

PSU banks have also agreed to enhance credit to small and medium enterprises (SMEs) and the housing sector to ensure adequate liquidity, the finance minister said.

The State Bank of India, the country's largest lender, has announced plans to cut lending rates even as a statement released by Bank of Maharashtra said all banks are going to cut lending rates by 75 basis points.

Banks are expected to set up a special committee to review the interest rates situation.

A few banks, including leading PSU lender Punjab National Bank, have already lowered their benchmark prime lending rate (BPLR) following a series of monetary measures taken by RBI.

Chidambaram said the RBI is likely to extend a Rs10,000 crore line of credit to the National Housing Bank to ensure that adequate funds are available for the housing sector.

Chidambaram who held wide-ranging consultations with the bank executives, said the demand for credit is higher and bankers are feeling the pressure.

''We are monitoring the situation on a 24 by 7 basis,'' he said, adding that he had also sought a fortnightly report on the credit growth from the banks.

SBI chairman O P Bhatt, PNB chief K C Chakrabarty, Bank of Baroda chairman M D Mallya, Canara Bank head A C Mahajan, UCO Bank CMD S K Goel were among those who attended the meeting. Top officials of the finance ministry and RBI were also present.