PSU bank stocks rise after RBI relaxes bad loan norms

Shares of public sector unit (PSU) banks on Tuesday gained up to 5% after the Reserve Bank of India (RBI) came out with a scheme for resolution of bad loans of large projects wherein a portion of the debt will be converted into equity or other instruments.

The scrip of Punjab National Bank (PNB) surged 5.18%, Bank of India rose by 3.14%, Bank of Baroda climbed 2.43% on the Bombay Stock Exchange (BSE).

Shares of Indian Overseas Bank (IOB) went up by 2.32% and State Bank of India (SBI) gained 2.27%.

RBI on Monday came out with a scheme for resolution of bad loans of large projects wherein a portion of the debt will be converted into equity or other instruments under supervision of Indian Banks' Association's (IBA) Overseeing Committee.

The Scheme for Sustainable Structuring of Stressed Assets (S4A) will cover those projects which have started commercial operations and have outstanding loan of over Rs 500 crore.

RBI said the S4A, an optional framework for resolution large stressed accounts, "envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around".

As per the resolution plan, the debt will be divided into two parts -- Part A will include debt which can be serviced from the existing operation while remaining will be classified as Part B.