Stocks of state-run banks slipped on Friday, after reports in a section of the media quoted a senior official in the finance ministry as saying that there was no proposal to hike the ceiling for FIIs in such banks.

Punjab National Bank was down by 2.9% at Rs 80.20, Bank of India was down 2% at Rs 38.20, Bank of Baroda was down by 1.5% at Rs 77.40, State Bank of India was down by 1.48% at Rs 301.85, Canara Bank was down by 1.4% at Rs 67.55, Union Bank of India was down by 1.3% at Rs 25.80 and Corporation Bank was down by 1.2% at Rs 141.80.

Public sector undertaking bank scrips have rallied sharply in the last few months on the back of optimism generated by the Securitisation Act, that paves the way for recovery of sticky assets of banks. The strong Q3 results of banks, coming on the back of treasury gains, have also led the rally. Domestic mutual fund Alliance Capital Mutual Fund was said to have turned active buyer in PSU bank shares. Earlier, the fund, having mopped up large chunk of PSU bank shares, offloaded them due to redemption pressure. The fund is now said to be once again buying these shares, after its US based parent said on Monday that it has decided not to exit from the Indian arm.

Friday's fall in PSU bank scrips was due to reports that the government has denied any moves to raise the limit for FIIs in public sector banks. Newspaper reports earlier said the government was likely to hike the 20% ceiling for FIIs in state-run banks.

The Securitisation Act, passed recently, has boosted bank stocks. It paves the way for recovery of sticky assets of banks. Hitherto, archaic laws tilted in favour of borrowers made it difficult for banks and financial institutions to recover debts. According to the ministry of finance, non-performing assets of public sector banks in India range between Rs 70,000 crore (Rs 700 billion) and Rs 100,000 crore (Rs 1000 billion). NPAs of banks and FIs account for over 5% of the gross domestic product.

Under the Securitisation Act, lenders can send notices to defaulters giving them a period of 60 days. If the borrower fails to pay during that period, the Securitisation Act allows banks to take possession of defaulters' properties and also the personal properties of promoters/directors pledged with the bank. The Act is a significant legislative initiative to address the malaise of mounting NPAs. Further, it paves the way for setting up of asset reconstruction companies to recover NPAs. Importantly, the Securitisation Act has created the right environment for the lending business, said analysts.

For Q3 ended 31 December 2002, most PSU banks posted upbeat Q3 results, largely on the back of treasury gains against the backdrop of a falling interest rate regime. A number of banks have cut deposit rates in the last one month.

Meanwhile, the finance ministry reportedly has cautioned banks that they are sitting on a huge interest rate risk, having invested large sums of money in government bonds.