The bank also revised its interest rates on term deposits on account of adequate liquidity in the system.
This is the sixth cut in MCLR in FY 2019-20 and it comes days after the Reserve Bank of India (RBI) lowered the repo rate by 25 basis points.
Worryingly, with banks reducing rates, FY19 and FY20 deposit growth will likely see fresh lows, according to experts.
With this lending rate reduction, the bank has lowered 40 bps so far this fiscal year in five successive rate cuts beginning April.
RBI Governor Shaktikanta Das has given enough hints that linking of interest rates to an external benchmark is likely to happen.
The revised rates are in contrast to bank deposit rates, which are already lower than post office term deposits or national savings certificates, that are expected to reduce in the coming months.
The interest rate for the five-year term deposit, recurring deposit Senior Citizens Savings Scheme has been raised to 7.8, 7.3 and 8.7 per cent, respectively.
The Punjab National Bank (PNB) on Thursday increased its Marginal Cost of Funds Based Lending Rate (MCLR) by 15 bps, with immediate effect.
At a time when banks are flooded with surplus liquidity, margins get squeezed and credit growth continues plunging, more banks are likely to slash interest rates on savings bank accounts.
The country's largest lending bank cut down its interest rate by 0.5 per cent for Savings Bank Deposits below Rs 1 crore, introducing a two-tier structure of interest rates for Savings Deposits.