Banks seek RBI nod to spread Q1 bond losses over four quarters

Yields on government securities reversed their trajectory after RBI announced a hawkish stance in its bimonthly policy review in June

Worried over mounting losses in their bond portfolio in the April-June quarter, banks have requested the Reserve Bank of India (RBI) to allow them to amortise mark-to -market losses (writing down assets at current values) over the next four quarters.

Yields on government securities (g-secs), which were on a declining path since early October last year, reversed their trajectory after RBI announced a hawkish stance in its bimonthly policy review in June. The yield on the 10-year benchmark government bond, for example, has moved up 18 basis points (bps) since the policy was announced.

“There will be losses in the bond portfolio in the first quarter (Q1) due to rise in yields. The Indian Banks’ Association, on behalf of member banks, has requested RBI to allow us to spread the losses over the next four quarters,” said a senior official from a large public sector bank (PSB).

There is precedence for such leeway. After the currency crisis of 2013, RBI took some unconventional steps in July last year, which changed the monetary policy stance resulting in rise in bond yields. RBI then allowed banks to spread their loss arising out of their bond portfolio over the next four quarters.

Trading profits was the only saving grace for banks, particularly the public sector ones, in recent quarters, at a time when rising provisioning due to steep increase in bad loans were eroding their profitability as well as capital. Most PSBs have seen erosion in the capital adequacy ratio (CAR) due to rise in non-performing assest provisioning. In addition, muted credit growth had made interest income growth weak.

“We estimate trading gains for PSBs to be constrained as the g-sec yield curve has hardened by 10 bps (10-year maturity) over Q4 of FY15,” ICICI Securities said in a note to its clients, referring to yield movement in the April-June quarter.

In addition to lower treasury gains, margins of banks were also under pressure during the first quarter, as most of them reduced the base rate, the benchmark reference rate to which all loan rates are linked. Banks had reduced the base rate by 25-30 bps during the first quarter in response to the central bank’s monetary easing. RBI had reduced the repo rate, the key policy rate by 75 bps between January and June. “April-June will be operationally tough for public sector undertakings as net interest margins will be affected by base rate cuts and treasury profit potential was also lower,” Nomura said in a report.