Rising bond yields impact over Rs 40,000cr for banking sector

Union Bank will take a call on MTM losses on Sept 30

The spurt in bond yields to 9 per cent on the 10-year gilt is expected to hurt the banking sector by Rs 40,000-45000 crore due to depreciation in bond portfolios, a top official of Union Bank of India said.     

Union Bank of India Chairman and Managing Director D Sarkar said he expects a 'market to market loss' (MTM) will be around Rs 40,000 crore for the banking industry in the July-September quarter.     MTM is valuing a financial asset at their market value and not the price at which they are bought.

"At this moment huge depreciation is coming in the bonds and there will be impact on margins," he said on the sidelines of FICCI organised Banking Conclave 2013.     

According to estimates for one basis point of rise in yield, depreciation impact will be of Rs  300 crore for the industry. The rise in yield had jumped by close to 150 basis points in the 10-year paper which mean the impact could be even Rs 45,000 crore.     

Sarkar said the Reserve Bank of India was expected to take some measure to protect their interest. "RBI has taken statistics and may be in 10-15 days they will take some action," he said.     

Sarkar said banks were asking for allowing movement of AFS (available for sale) bonds to HTM (held to maturity) category and this would offer some temporary relief.

Banks would need to book depreciation for the bonds kept in the AFS and held for trading (HFT) categories but bonds that are part of held-to-maturity (HTM) would not require to do the same.     

Sarkar also urged that RBI should allow provisions for mark to market losses to be spread across more than one quarter, to avoid a "one-time shock".