Mumbai: Shares of public sector banks plummeted on Wednesday after earnings reported by some of them on Tuesday indicated the extent of the bad loan problem in the banking sector.

The Reserve Bank of India (RBI), following an asset quality review, has asked banks to reclassify loans that are visibly stressed as non-performing assets (NPAs) and also make adequate provisions against such loans. This has meant that most public sector banks are reporting a sharp fall in profits.

Shares of Central Bank of India fell 12.4% to close at 54.20, Allahabad Bank 9.6% to 46.10, Dena Bank 7.4% to 28.95 and Punjab National Bank 9% to 79.95.

On Tuesday, Central Bank of India, Allahabad Bank and Dena Bank posted a net loss, while Punjab National Bank’s (PNB’s) net profit plummeted 93% for the three months ended 31 December from a year ago.

Shares of banks that are due to report earnings over the next few days also fell on fears that their profits may also be impacted.

Indian Overseas Bank shares closed 5.2% lower, after the bank reported net loss of 1,425.06 crore in the December quarter. Others like UCO Bank fell 8.1%, Oriental Bank of Commerce 7.4%, Andhra Bank 7.2%, Bank of India 5.8%, Syndicate Bank 5.4%, Bank of Baroda 5.3%, Union Bank of India 4.9%, Corporation Bank 4.2%, Canara Bank 3.8%, IDBI Bank Ltd 3.4%, Indian Bank 2.3%.

State Bank of India (SBI), which reports earnings on Thursday, was down 4.82% to 158.95, a level last seen on 6 March 2014. According to the consensus estimate of 23 analysts polled by Bloomberg, SBI is likely to post a net profit of 3,222.80 crore.

“The near-term outlook for PSBs is not looking promising, given NPAs are likely to remain elevated due to the sluggish economic recovery, lack of management initiatives on business growth front and low usages of digitalization in banking activities," said Amit Singh, vice-president, institutional equities at Choice Broking.

“However, we are of the view that despite some near term concern, the medium to long term picture of industry looks bright on the back of low penetration level of the industry, increase in working population, growing disposable incomes and rising middle class. Furthermore, reducing government interference in banking activities, latest norms like 5/25 and strategic debt restructuring (SDR) are likely to positively impact the PSBs", Singh added.

Overall, the Nifty PSU Index fell 5.4% to 2,048.80 points—a level last seen on 4 September 2013. Year-to-date, this index of PSU bank stocks has fallen 28.5%.