SBI wants to 'charge' MTM losses to balance sheet

Lender makes presentation to RBI on the proposal

Faced with the prospects of a severe pressure on profitability, State Bank of India has requested the Reserve Bank of India to allow it to charge mark-to-market (MTM, writing down assets in line with current valuations) losses to its balance sheet instead of profit-and-loss accounts, to soften the blow.

A senior SBI executive said that making provisions for MTM losses, especially for the huge government bonds portfolio, from annual accounts (profit and loss) hits the current performance profitability. The bank had recently made a representation to the banking regulator.

The way out is to take MTM losses through the balance sheet, which, with its large size, is in a much better position to absorb the shocks than just the annual accounts, the executive quoted above said.

According to another SBI executive, beside the provision for losses on treasury operations, there is also the pressure of set-aside amounts for bad loans and wage revision.

One analyst with a large Indian broking house said banks are holding large portfolio of government securities to meet the statutory liquidity ratio (SLR) norms (24 per cent) prescribed by the regulator.

Bond prices have eroded in the past few quarters, putting immense pressure on banks to make provisions out of quarterly profits. The regulatory requirement should not impact the current performance, analyst said.

Early in the last decade, RBI had advised banks to create investment fluctuation reserves (IFR) when they were transiting to Basel-II norms. IFR was to build up adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments. Banks were advised to build up IFR of a minimum five per cent of the investment portfolio within a period of five years.

On the back of four straight quarters of fall in net profits, SBI has embarked on a one-year action plan to contain slippages and improve profitability. It reported a 34 per cent year-on-year decline in net profit for the quarter ended December 2013 to Rs 2,234 crore.

To start with, the bank identified four areas where efforts will be beefed up. These are: containing slippages, cost control, boosting other income stream and improving employee productivity. The lender has also divided the action plan in four time frames, starting from 40 days to one year. All goals have been sub-divided into various time buckets - next 40 days, three months, six months and one year. The exact targets for each time bucket have not yet been firmed up as of now.

The aim is to show better performance in the fourth quarter, which would be the basis for long-term uptick in overall credit and financial profile. It will go beyond the numbers to make the organisation robust and motivate employees, an official said.