India state-run bank shares rally after RBI eases bankruptcy provision needs

MUMBAI (Reuters) - India's state-run bank shares rallied on Thursday after the Reserve Bank of India (RBI) lowered the amount the lenders needed to set aside as of end-March for their loans to nearly 40 companies that are undergoing bankruptcy resolution proceedings.

The RBI has allowed banks to have a minimum provisioning cover of 40 percent on secured loans to those companies, lower than the minimum 50 percent it had earlier wanted them to set aside for those loans, according to bankers and a letter seen by Reuters.

The banks will need to achieve 50 percent provision cover for those loans by end-June, said the bankers and the letter.

The RBI move comes at a time when banks already battling near-record levels of soured loans are staring at an increase in stressed assets after a rule change announced in February.

The financial sector has also been stunned by a massive $2 billion fraud in state-run Punjab National Bank that has implications on several other lenders.

PNB has agreed to pay the counterparty banks for any loss from the fraud. The RBI previously gave a go-ahead to PNB to spread the provisions for the fraud-related losses over four quarters, banking sources have said.

The state-run bank index was trading 2.1 percent higher by 0559 GMT, while the overall bank index rose 1.2 percent. The main Mumbai market index rose 1.3 percent.

Sentiment was also positive ahead of the RBI's monetary policy announcement due later in the day with traders expecting the central bank to sound less hawkish, thereby pushing back rate hike fears.

(Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Editing by Euan Rocha and Stephen Coates)