MUMBAI (Reuters) - The NSE Nifty fell more than 1 percent on Friday to hit a three-month low below the key 7,600 level as lenders slumped after the central bank said it would examine how the sector was dealing with bad debt.
Reserve Bank of India Governor Raghuram Rajan said he would look into how the country's banks are using provisions they were given to help tackle a crippling bad debt burden.
India's banks are facing criticism over their use of one of the most high profile tools offered to the sector by the RBI - strategic debt restructuring (SDR), which helps banks swap unpaid debt for majority control.
Broader sentiment was also weak ahead of the U.S. Federal Reserve meeting next week and as investors await progress on a key tax reform in the ongoing session of parliament.
Foreign investors have sold 51.03 billion rupees ($764.1 million) worth of stocks in the month, compared with 70.74 billion rupees ($1.06 billion) sold for the entire month of November.
"FIIs selling, proceedings in parliament and weakness ahead of the Fed are weighing on markets," said Gaurang Shah, vice president at Geojit BNP Paribas.
More From This Section
"There is a worry now that balance sheets will be stretched," he added, referring to the decline in bank shares on Friday.
The broader Nifty was down 1.18 percent after falling as much as 1.4 percent to its lowest since Sept. 8 earlier in the session. The index was on track for a decline of 2.6 percent for the week.
The benchmark BSE Sensex was 1.12 percent lower, heading for a drop of 2.6 percent for the week.
The Bank Nifty, an NSE sub-index, fell as much as 2.52 percent, its biggest single-day fall since Oct. 28, on worries banks would need to create higher provisions to deal with stressed assets.
Among banking stocks, ICICI Bank fell 3.7 percent, HDFC Bank dropped 1 percent and Axis Bank declined 2 percent.
Auto companies Mahindra and Mahindra fell 3.6 percent, Tata Motors dropped 3.4 percent, Maruti Suzuki slipped 1.42 percent and Eicher Motors declined 3.18 percent on media reports that the National Green Tribunal had called for no new diesel vehicles to be registered in Delhi to curb air pollution.
Bucking the trend, steel stocks gained amid expectations of more curbs on imports. Bhushan Steel rose 3.7 percent, while Tata Steel rose 3.09 percent.
($1 = 66.7850 Indian rupees)
(Reporting by Karen Rebelo in Mumbai; Editing by Subhranshu Sahu)