There's a flurry of activity in banking stocks, extending a rather long rally that began with the passage of the Securitisation Bill in November 2002.

Major movers today included Oriental Bank of Commerce (up 6.9% to Rs 80.15), Bank of Baroda (up 3.2% to Rs 93.25), Union Bank of India (up 3.6% to Rs 27.25), Dena Bank (up 6% to Rs 14.20), Syndicate Bank (up 3.2% to Rs 19.20), Canara Bank (up 2.5% to Rs 79.40), Bank of India (up 2.4% to Rs 41.50), Indian Overseas Bank (up 2.9% to Rs 17.75), Corporation Bank (up 2.2% to Rs 142.50) and Andhra Bank (up 2.2% to Rs 29.30).

A renewed buying is being witnessed in banking PSU shares over the last few trading sessions. The star gainer so far has been OBC. The scrip has surged 32.2% in 8 trading sessions from Rs 60.60 on 25 March 2003 to the current level of Rs 80.15. BoB, too, is the subject of major buying - growing 15.9% from Rs 80.45 on 17 March 2003. BoI has expanded 30% from Rs 31.90 on 11 March 2003. Canara Bank has jumped 32.4% from Rs 59.95 on 10 March 2003 and UBI has climbed 23.3% from Rs 22.10 on 10 March 2003.

Analysts say some like OBC and BoB are trading at attractive valuations and, this, is setting off renewed buying interest in these stocks.

But, primarily, there seem two key triggers for banking PSU stocks – the falling interest rates and improvement in asset quality of banks with most of them having written off non-performing assets against treasury income.

Analysts say, with falling interest rates, treasury portfolio of banks will get a further boost. Analysts expect the short term outlook for interest rates to be bullish - interest rates is likely fall in the short term. There are also expectations that RBI may cut the benchmark bank rate by 50 basis points.

The Securitisation Bill (passed in Parliament in November 2002) has also proved a veritable boon for the baking sector as a whole. The bill paves the way for recovery of sticky assets of banks without additional court procedures. More importantly, the bill has created the right environment for the lending business as a whole. With stringent laws, the incremental NPAs will now be lower. With the new law, banks have been empowered to attach assets of defaulters without having to seek access to law.

Hitherto weak laws ensured that borrowers obtained money easily but were not pressured to repay dues, resulting in huge sticky loans - currently estimated at over Rs 1,00,000 crore (Rs 1000 billion) - in the banking system.

In recent years, falling interest rates have led to appreciation in value of G-sec, 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 banks. The manpower for each bank will be determined by customer profile, network of branches and the level of computerisation. In the first phase, s 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 banks to improve productivity and profitability significantly.