A host of public sector banks got the taste of losses for the second day on Wednesday on reports that the government may bring down interest rates on recapitalisation bonds.

Among the losers were Bank of Baroda (down 4% to Rs 76.55), Oriental Bank of Commerce (down 4% to Rs 55.85), Punjab National Bank (down 3.9% to Rs 81.45), Union Bank of India (down 3.4% to Rs 23.95), Canara Bank (down 2.9% to Rs 63.95), Andhra Bank (down 2% to Rs 28.30) and State Bank of India (down 1.1% to Rs 303.55).

On Tuesday, when a similar loss-making trend was witnessed, the combined market cap of 17 PSU banks fell 3.2% to Rs 34,402 crore (Rs 344.02 billion). Dealers say there is unwinding of positions going on in bank stocks by operators. High volumes were witnessed today in stocks like UBI (1.33 million shares), Andhra Bank (1.33 million), Canara Bank (1.17 million shares) and SBI (900,000 shares).

The sector had indeed impressed with a smart rally from mid-November 2002 on. But shares of PSU banks are currently witnessing volatility, rising one day and falling the next.

In the last one month, the combined market cap of 17 PSU banks rose 2.9% to Rs 34,402 crore (Rs 34.402 billion).

On Wednesday, PSU banks are declining on reports that the government may bring down interest rates on recapitalisation bonds held by public sector banks from the current 9-10% to market related rates of 6-8%. Some of the weaker public sector banks like Bank of India had issued bonds to the government to meet tier-II capital. However, analysts say most of the banks have already redeemed these bonds and the outstanding amount of these bonds is not much and, therefore, may not have much impact.

Banking analysts say some key developments have taken place in the banking sector including the passage of the Securitisation Bill in Parliament and the sharp fall in interest rates over the years. Both these developments are likely to benefit public sector banks to the maximum. Some public sector banks like SBI are aggressively focussing on the retail segment now.

The fall in interest rates will mean that public sector banks have made huge unrealised gains in their investment portfolio (viz that of investment in gilts).

Banking analysts say the Securitisation Bill is a major development for the banking sector as the incremental NPAs will now be lower. Recently, the debt recovery tribunal allowed sale of assets in case of SPIC Petro that had defaulted on borrowings from a consortium of banks.