Stocks in the banking sector have been in the limelight of late, following sustained buying support from institutions as well as operators.

In fact, there was hectic activity in these  stocks last week, extending a  long rally that began with the passage of the Securitisation Bill in Parliament in November 2002.

Oriental Bank of Commerce was the major gainer. The stock advanced last week to touch a new 52-week high of Rs 83.35 in intra-day trades on Friday before settling at Rs 79.70, gaining 20.94% over its previous week's close of Rs 65.90.

Others like State Bank of India (up 3.09% to Rs 283.45), Canara Bank (up 8.76% to Rs 79.45), Punjab National Bank (up 1.36% to Rs 108.30), Bank of Baroda (up 7.94% to Rs 95.15), Bank of India (up 9.49% to Rs 42.10), Corporation Bank (up 4.80% to Rs 144.90), Union Bank of India (up 5.21% to Rs 27.75), Andhra Bank (up 6.36% to Rs 30.45) and Syndicate Bank (up 14.23% to Rs 19.25) also posted gains last week on renewed buying support.

Private sector bank stocks like HDFC Bank (up 2.43% to Rs 240), ICICI Bank (up 2% to Rs 137.15), Vysya Bank (up 1.40% to Rs 249.50), Federal Bank (up 7.82% to Rs 103.30) and J & K Bank (up 10.53% to Rs 128.55) also recorded gains.

Stocks in the banking sector have been faring extremely well due to a combination of factors. While the  Securitisation Act has helped banks to recover debts easily, huge bond trading profits are expected after a steep fall in yields. Also, a proposal from the government is expected to help banks write off more bad loans.

The Securitisation Act paves the way for recovery of sticky assets of banks without additional court procedures. More importantly, it has created the right environment for the lending business as a whole. Hitherto weak laws ensured that borrowers obtained loans easily but were not pressurised to repay them, resulting in huge NPAs - currently estimated at over Rs 1,00,000 crore (Rs 1000 billion) in the banking system. Meanwhile, ICICI Bank and SBI have seized the assets of defaulting companies.

There are hopes that the Reserve Bank of India may slash the key bank rate in the Credit Policy to be announced at the end of this month.

With the corporate results season round the corner, expectations on this count are driving up  the stocks in the banking sector. Bank credit has picked up considerably on the back of growth in retail lending, while falling interest rates have lifted the treasury income of banks.

The banking sector has been one of the biggest beneficiaries of the Union Budget for 2003-04. The voluntary gilts buy-back offer proposed in the Budget is a positive development for both the banks and the Centre. The proposal has assisted banks in cleaning up their balance sheets by allowing them to allocate profits earned from such sales towards non-performing asset provisions, especially since profit from such sales is exempted from tax. Similarly, the move to extend merger & acquisition benefits to state-run banks will help consolidation in the sector.

The Budget also gave a green signal to raise the foreign direct investment limit in private sector banks from 49% to 74%. Meanwhile, the proposed hike in FDI ceiling in state-run banks will be looked into by the Reserve Bank of India on a case-to-case basis.

In recent years, falling interest rates have led to appreciation in value of gilts, giving banks the chance to book huge treasury profits. Last year, many banks booked handsome profits on appreciation in their value of investments. This year, even interest spreads are expanding as banks aggressively reduce borrowing costs and benefit from lower rates on past deposits when renewed.

Further, the government is considering a proposal to begin a second round of the Voluntary Retirement Scheme for state-run banks. The manpower for each bank will be determined by customer profile, network of branches and the level of computerisation. In the first phase, around 1,00,000 people had opted for VRS offered by various banks. This had reduced the manpower of banks by 12-15% and helped them to improve productivity and profitability significantly.