The Reserve Bank of India has asked banks to set aside at least 50 percent of the loan amount for accounts referred to bankruptcy courts, The Economic Times reported on Monday citing two bankers familiar with the order. The move could hurt banks' earnings to the tune of Rs 50,000 crore, it reported.
Analysts expect government-owned banks to be the worst affected as they hold the chunk of defaulted loans in the country.
"PSU banks will be under pressure for some more time as improvement in earnings for these banks will get delayed due to higher provisioning requirement," said Siddharth Purohit, senior research analyst at Angel Broking.
The broader NSE Nifty ended 0.66 percent or 64 points lower at 9,511 while the benchmark BSE index closed 0.57 percent or 180 points lower at 30,958.
The NIFTY PSU Bank index slid as much as 4.26 percent to its lowest since March 24.
India's biggest lender State Bank of India declined as much as 3.3 percent while Bank of Baroda Ltd fell as much as 4.8 percent to its lowest since Jan. 23.
Aurobindo Pharma Ltd climbed as much as 3 percent to its highest since March 24 after Jefferies analysts raised price target on the stock to Rs 780 from 750 and maintained their "buy" rating.
The broader markets also faced the heat of selling pressure. The BSE mid-cap index declined 0.78 percent and the small-cap index fell 1.56 percent.
The overall market breadth was extremely bearish as 1,879 shares ended lower while 712 closed higher on the BSE.