A broad-based decline was witnessed in banking shares on Monday on concerns over the rise in interest rates and the fall in prices of government securities.

Scrips of public as well as private sector banks declined today. Among the top losers were Andhra Bank (down 4.8% to Rs 26.50), J&K Bank (down 4.1% to Rs 127.25), Union Bank of India (down 3.7% to Rs 24.70), Bank of India (down 3.3% to Rs 36.60) and Indian Overseas Bank (down 3.1% to Rs 17.15).

Other losers were India's largest commercial bank State Bank of India (down 1.3% to Rs 297.50), ICICI Bank (down 2.5% to Rs 139.90), Oriental Bank of Commerce (down 2.5% to Rs 54.15), Federal Bank (down 2.4% to Rs 91.40), Canara Bank (down 2.3% to Rs 65.15) and Punjab National Bank (down 1.8% to Rs 79.60).

The current decline in bank shares materialises after they surged sharply over the last few months following optimism over the passage of the Securitisation Bill in Parliament late November 2002. The bill paves way for recovery of banks' sticky loans.

Market men say that banks may not be able to gain as much from their investment in gilts as their prices are easing from earlier highs as of now. As per latest reports, leading public sector bank Bank of Baroda raised deposit rates with effect from today. The bank raised deposit rates by 25 to 50 basis points, to 4.75% to 6.0% depending on various maturities.

Dealers say there are some concerns over the current easing of gilt prices. These had surged sharply in recent years on the back of falling interest rates. Yields on gilts had fallen to historic lows in mid-January 2003. However, interest rates had inched ahead amid fears of a US-Iraq war and gilt prices have pared their gains. It is however felt that banks may not aggressively sell their gilts portfolio at this juncture as it could affect their yields. It is only when banks see a revival of credit offtake that they may book profits on their investment in gilts.

Meanwhile, the Securitisation Bill has proved a solid leverage for the banking sector. 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, say analysts.