Indian shares fell on Wednesday after a central bank directive banning issuance of letters of undertaking (LoU) by lenders hit bank stocks while revelations by Punjab National Bank of additional exposure in an alleged fraud further dampened sentiment.
The Reserve Bank of India (RBI) barred all lenders from issuing letters of undertaking (LoU) - a form of credit guarantee at the heart of a major fraud that shook the financial sector last month. The instruments are all forms of trade finance often used by importers to fund their overseas purchases.
Punjab National Bank told police on Tuesday that it had uncovered additional exposure of about 9.42 billion rupees ($144.83 mln) to Gitanjali group of companies, taking its overall exposure in connection with the fraud to well over the $2-billion mark.
The broader NSE Nifty dropped 0.48 percent to 10,376.35 as of 0545 GMT, while the benchmark BSE Sensex fell 0.45 percent to 33,705.14.
"The selling in banking stocks on rising delinquencies along with RBI's move to ban LoUs and a weak international market is weighing on domestic stocks," said Saurabh Jain, assistant vice president of research at SMC Global Securities.
"There is not much confidence in the market."
The Nifty PSU bank index fell 2.2 percent, with Punjab National Bank declining 4.8 percent, while Bank of India Ltd dropped 4.1 percent.
Bucking the broader trend, Fortis Healthcare Ltd rose as much as 5.5 percent on reports that IHH Healthcare Bhd is set to launch an open offer to buy non-promoter shares of the company in the next few days.
Asian shares fell amid fears of rising U.S. protectionism as President Donald Trump fired his Secretary of State and sought to impose hefty tariffs on Chinese imports. MSCI's broadest index of Asia-Pacific shares outside Japan stumbled 0.71 percent.