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Gilt yields end up in 2004-05 after 8 years

Our Banking Bureau  |  Mumbai 

Yield on up by over 1.5%.
After a gap of eight years, yields on are higher at the end of the fiscal year than they were at the beginning. As a result, commercial banks will be required to make mark-to-market provisions in their investment portfolios.
The yield on the benchmark 10-year government security "" a barometer for interest rate movement in the gilts market "" has risen by over one and a half percentage points during 2004-05 (from 5.12 per cent at the beginning of the year to around 6.65 per cent now).
In contrast, the yield on the benchmark had dropped by about one percentage point (from 6.09 per cent to 5.12 per cent) in the previous year.
This has been the story since 1996-97, when the yield on the dropped by about 60 basis points (one basis point is one hundredth of a percentage point).
The sharpest fall was in 2001-02 when the yield dropped by close to three percentage points (from 10.32 per cent to 7.47 per cent). Overall, the yield on the 10-year paper has come down from a high of 14.01 per cent in April 1996 to around 6.65 per cent now.
It did cross the 7 per cent mark to reach 7.31 per cent in the course of the year but subsequently came down. The lowest level of the 10-year paper yield was seen on October 16, 2003, when it touched 4.95 per cent.
Bankers are keeping their fingers crossed on the hit they will take on the balance sheet in marking to market their investment in government paper under the (AFS) and (AFT) category.
In the mark-to-market formula, banks need to provide for to bridge the gap between the acquisition price and the market price of a security. With the rise in rates, the price falls (they move in inverse direction) and hence the requirement for provision.
However, the (HTM) category is not affected by the movement in rates as paper in this basket need not be marked to market. Most of the banks have shifted statutory liquidity ratio paper kept under other baskets to to ward off the impact of rates.
"It is very difficult to calculate the actual impact on their balance sheets," said a banking sector analyst.
Dipankar Choudhury, vice president of ICICI Securities, said sequentially the level of rise in yield has been coming down over the quarters.
For instance, the first quarter of 2004-05, the rise was 72 basis points. It came down to 40 basis points in second quarter of the year, 30 basis points in the third quarter and probably around 15 basis points in the last quarter.
"Banks have been providing for this," he pointed out. The outstanding portfolio of the banking sector is over Rs 7 lakh crore.
In the first nine months of the fiscal year, 37 listed banks have provided for Rs 6795.29 crore against a full year provision of Rs 9265.74 last year. This is inclusive of provisions for non-performing assets. "They may have to jack up the provision in the last quarter," said another analyst.
Senior bankers however said that hit on the bond portfolio will be more than compensated by the rise in interest income on account of massive offtake in non-food credit. The year-on-year growth in credit is Rs 2,46,814 crore or 30 per cent against Rs 1,06,847 crore or 14.9 per cent last year.
The interest income of the 37 listed banks in the first three quarters was to the tune of Rs 91,542.29 crore against last year's Rs 1,15,306.52 crore. In contrast, their treasury revenue was Rs 46,535.66 crore against Rs 68,440.22 crore.

First Published: Tue, March 29 2005. 00:00 IST