Shares of private sector banks gain further ground on Monday, after the raising of the FDI ceiling in these banks to 74% from 49%.

Centurion Bank (up 11.80% to Rs 9.95), Karur Vysya Bank (up 8.96% to Rs 195.15), Federal Bank (up 6.06% to Rs 102.45), Karnataka Bank (up 8.70% to Rs 63.10), Global Trust Bank (up 5.99% to Rs 17.70), IDBI Bank (up 4.37% to Rs 25.10), J&K Bank (up 3.67% to Rs 125.65), UTI Bank (up 3.37% to Rs 44.50) and ING Vysya Bank (up 2.72% to Rs 287) were the major gainers on the BSE in early-afternoon trades.

Analysts said the hike in the foreign direct investment limit under the automatic route in private sector banks in the Union Budget for 2003-04 - from the current 49% to 74% - is a positive development for these banks. Prior to the announcement of the Union Budget last Friday, there were reports that the FDI limit may be raised to 100%.

Meanwhile, currently, the voting rights of any person holding shares of a banking company are restricted to 10% irrespective of his/her shareholding. The Banking Regulation Act, 1949 will now be amended to remove this limitation. This is another positive development for private sector banks, according to analysts.

Moreover, many private sector banks, which are facing difficulty on account of low Capital Adequacy Ratio and are unable to lend to the extent of their potential. They will now have a option to raise capital from overseas investors at a much competitive price.

Also, the extension of Section 72A benifits of the Income Tax Act to nationalised banks will encourage the merger of private sector banks with state-run banks, boosting the merger and acquisition activity.

The cut in small savings interest rates by 1% from the earlier 9% to 8%, may raise any bank's earnings in two ways. Firstly, it will reduce the cost of funds due to reduction in deposit rates. Secondly, there will be higher treasury income, largely due to the appreciation in the value of investments made in government securities.

In the last one month, 18 private sector banks have added Rs 590.97 crore (Rs 5.9 billion), or 2.95%, in market capitalisation to Rs 20,638.13 crore (Rs 206.38 billion) from Rs 20,047.16 crore (Rs 200.47 billion).