RBI monetary policy: Finance Ministry says MTM losses for banks will rise

Finance ministry officials feel that the Reserve Bank of India’s decision to change a valuation rule related to state government securities will increase the mark-to-market (MTM) losses incurred by public sector banks.

At present, state government securities are valued at a fixed mark-up of 25 basis points above the corresponding central government securities. The RBI has now said securities issued by each state government should be valued at market prices.

The finance ministry officials were also of the view that banks will have to register more losses on their books in the first three quarters of the financial year due to the regulator’s move to allow spreading of MTM losses over four quarters. The regulator has allowed the banks to spread their MTM losses related to the first quarter (April-June).

Officials said public sector banks already have overhang of MTM losses between December 2017 and March 2018, which they were spreading over four quarters. More losses would now be required to be loaded from Q1 to Q3 of the current financial year.

Soon after the RBI announced its bi-monthly monetary policy on Wednesday, Finance Minister Piyush Goyal held a meeting with top bureaucrats of the Finance Ministry, including finance secretary Hasmukh Adhia, economic affairs secretary Subhash Chandra Garg, financial services secretary Rajiv Kumar and expenditure secretary Ajay Narayan Jha.

The finance ministry feels that most impact of the repo rate hike by the Reserve Bank of India (RBI) has already been discounted by banks. For the first time in over four years, the RBI decided to hike the repo rate by 0.25 per cent to 6.25 per cent, citing risks to inflation.

Finance Ministry officials said many banks, including State Bank of India (SBI), ICICI Bank, Bank of Baroda (BoB) and Punjab National Bank (PNB), have already hiked their benchmark lending rates last week – before the RBI policy. 

“Though the repo rate hike may lead to marginal increase in interest rates in the market, this was mostly discounted already as interest rates are now determined by a host of other factors, especially liquidity,” a key official said.

Financial services secretary Rajiv Kumar said the RBI’s move to allow the inclusion of 2 per cent additional government securities held by banks to meet the liquidity coverage ratio (LCR) will “free up liquidity for banks.” The total carve-out from statutory liquidity ratio (SLR) available to banks would now be 13 per cent.