Banking PSU stocks were being drubbed today following reports that the Centre may charge a premium on returned equity by these banks. The reports brought gloom overall to banking PSUs, that have been the subject of an incredible rise in recent months.

In fact, nearly the entire sector was in the slipstream today - Vijaya Bank (down 4.29% to Rs 18.95), Dena Bank (down 3.37% to Rs 17.20), Oriental Bank of Commerce (down 2.90% to Rs 122), Union Bank (down 2.88% to Rs 32), Bank of Baroda (down 2.61% to Rs 100.75), Punjab National Bank (down 1.93% to Rs 142.02), Canara Bank (down 0.80% to Rs 93.50), Bank of India (down 1.49% to Rs 46.15), and Andhra Bank (down 0.98% to Rs 30.35).

In six sessions between 6 and 13 June 2003, the 17 listed banking PSUs lost Rs 2,715.41 crore or 5.87% to Rs 43,537.90 crore in market capitalisation (m-cap).

Already, banking stocks have taken a hit over the `premium or par' issue. But these latest reports that the government may differentiate between returned equity of listed and unlisted public sector banks has hurt banking PSU stocks deeply.

Weakness has also cropped up in these stocks on reports that the Securities and Exchange Board of India (Sebi) will be probing into the abnormal movement, over the past several weeks, of public sector bank stocks . The six banking PSUs under the Sebi scanner are Punjab National Bank, Indian Overseas Bank, Andhra Bank, Bank of India, Bank of Baroda and Corporation Bank

Earlier, there were reports that the finance minister Jaswant Singh had asked the Securities and Exchange Board of India (Sebi) to look into the abnormal movement of public sector bank stocks over the past several weeks and immediately submit a report to the finance ministry.

Dealers say due to the reports of a Sebi inquiry into banking PSU stocks, players, especially operators, have already moved out of these stocks.

Bank stocks were in a rush upwards of late as many banking PSUs were contemplating equity reduction through return of government capital. An added incentive for acquiring banking PSU stocks was their low valuation.

Meanwhile 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.

Results from the PSU banking sector have been impressive so far. On an aggregate, seven banking PSUs recorded a 76% rise in net profit to Rs 1,145.72 crore (Rs 649.82 crore) on a 34% increase in net total income to Rs 4,661.64 crore (Rs 3,484.36 crore).

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.