Reserve Bank of India allows banks to spread bond losses

The Reserve Bank of India (RBI) on Monday allowed banks to spread their mark-to-market (MTM) losses, incurred due to adverse yield movement in December and March quarter over four quarters. 

To absorb such losses in future, the central bank instructed banks to create an Investment Fluctuation Reserve (IFR) from the start of the current fiscal. 

Bond yields had moved 70 basis points up in the December quarter, but recovered about 20 basis points in the March quarter after lower-than expected first half borrowing plan. 

The December quarter movement cost the banking sector MTM losses of at least Rs 150 billion. They had asked the central bank to allow them to spread the loss over four quarters, which the RBI agreed on Monday.  

“The provisioning for each of these quarters (Q3 and Q4) may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred,” the RBI said.

The banks will have to make disclosures in their notes to accounts providing details of the provisions for depreciation made during the two quarters, and also the balance required to be made in the remaining quarters.

The IFR should hold at least 2 per cent of the held for trading (HFT) and available for sales (AFS) portfolio, on a continuing basis. 

“Where feasible, this should be achieved within a period of three years,” the RBI said.  

“A bank may, at its discretion, draw down the balance available in IFR in excess of 2 per cent of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year.”

Even if the balance at IFR is less than 2 per cent of the HFT and AFS portfolio, a drawdown will be allowed only for meeting the minimum core capital requirements.

The IFR will be eligible for inclusion in tier-2 capital, the RBI said. ST/SGST account by way of settlement, it added.