Banks' provisions for treasury losses to soar

Yield on 10-year benchmark govt bond 7.16% 2023 had ended at 7.44% on end-June, while it stands at 8.42%

Despite the Reserve Bank of India (RBI) announcing various steps to address market conditions, banks are set to make huge provisioning on treasury losses for the quarter ended September, as bond yields have risen sharply.

The yield on the 7.16 per cent 10-year benchmark government bond stood at 7.44 per cent at the end of June; currently, it stands at 8.42 per cent. On August 19, it had touched 9.23 per cent, prompting RBI to announce various measures.

The central bank had allowed banks to retain statutory liquidity ratio (SLR) holdings in the held-to-maturity (HTM) category at 24.5 per cent of banks’ net demand and time liabilities (NDTL), against 23 per cent earlier. Now, banks can also transfer SLR securities to the HTM category from the available-for-sale (AFS) and held-for-trading (HFT) categories up to 24.5 per cent, as a one-time measure. Besides, banks were allowed to spread the net depreciation on account of the mark-to-market-valuation of securities held under the AFS/HFT categories through the remaining period of this financial year in equal instalments.

“The yields were very volatile in the last quarter. Due to this, banks would be booking losses in their treasury portfolios. The environment is very different from the first quarter, when many banks booked profits on their treasury portfolios. Even if the losses can be spread across three quarters, according to an RBI directive, banks would have to make huge provisions for this,” said the head of treasury of a public sector bank.

Banks had invested in government bonds, as well as corporate bonds. But the yields in both categories rose sharply due to RBI’s liquidity-tightening measures, aimed at arresting volatility in the rupee. “A lot of these banks had investments in their AFS portfolio. It could be either corporate bonds or gilts. Despite amortisation in the three quarters, the one-quarter impact of it will be substantial,” said Rajiv Mehta, banking analyst with India Infoline.

For most banks, the SLR portfolios stand at 28-29 per cent. Of this, about two per cent is in treasury bills and the remaining is in bonds. “The HTM portfolio is 24.5 per cent and the remaining portion will take a big hit. The only advantage is banks can spread the losses across three quarters. Whatever profits banks had made in the first quarter in the treasury portfolio have been eroded in the second quarter,” said the treasury head of a private sector bank.