Bank stocks took a hammering today as the Centre said it was not in its policy to take back its equity from public sector banks at par value.

The reports had an immediate negative impact on banking PSU stocks on opening today - Canara Bank (down 16.96% to Rs 96.40), PNB (down 18.81% to Rs 145.65), Bank of India (down 9.24% to Rs 49.60), Oriental Bank of Commerce (down 15.52% to Rs 114), Syndicate Bank (down 9.85% to Rs 24.25), Bank of Baroda (down 11.78% to Rs 103), Syndicate Bank (down 9.85% to Rs 24.25) and Andhra Bank (down 9.47% to Rs 32.50).

However, dealers are still debating over the veracity of the latest reports on the Centre's approach to returned equity. In fact, these reports are in direct contrast to a report that appeared only last week that said the government was open to taking back equity at par and not at premium.

Some dealers remind that the Centre has already taken back its equity from a couple of public sector banks at par. So, they do not expect a change of attitude just because bank stocks are in the rally phase.

Bank stocks were in a rush upwards of late  as many banking PSUs were contemplating equity reduction through return of government capital. Between 30 April and 30 May 2003, the 17 listed banking PSUs added Rs 11,653.4 crore or 32.3% to Rs 47,717.9 crore in terms of market capitalisation. A major incentive for acquiring banking PSU stocks was their low valuation.

A flush of positive developments have characterised the banking sector of late,  prompting FIIs to pitch into these stocks in a major way. Analysts view the sector as one with huge potential. Current performances by most banks have vindicated that reckoning. Market players had been shifting to bank stocks to enhance their investment portfolios. Banks have for long been lowly valued, but, with prospects looking impressive there has been huge interest in them.

It was the Securitisation Act that firmly brought market attention to bank stocks. The Securitisation Act allows lenders to attach assets of defaulting borrowers without having to go to court for the purpose. The Act paves the way for the setting up of asset reconstruction companies (ARCs) to recover non-performing assets (NPAs). Hitherto, archaic laws, tilted in favour of borrowers, made recovery of debts a difficult task for banks and financial institutions. Any recovery of debt should now enable banks to boost bottom lines , it is reckoned.