PSU banks gain as RBI lets banks spread bond losses in 4 quarters

PSU Banks gained up to 4.5% after The Reserve Bank of India on Monday allowed banks to spread provisions for bond losses in the third and fourth quarters of FY18 over the next four quarters.

The central bank said the provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss was incurred.

Nifty PSU Bank index rose over 2% with all its constituents trading in green in early morning deals. Bank of India, Union Bank of India, Bank of Baroda and Syndicate Bank were up in the range of 3%-4.5%.

This relaxation also comes in the backdrop of the possibility of banks facing huge provisioning burden towards bad loans in the fourth quarter.

While this decision will provide some “relief” to government-owned banks in the short-term, it merely pushes the problem to the new fiscal year that began April 1, analysts said.

Besides allowing banks to stagger the bond investment depreciation provisioning over four quarters, the RBI has asked them to build up reserves to protect themselves against an increase in yields. Banks have been advised to create an Investment Fluctuation Reserve (IFR), which will be eligible for inclusion in Tier 2 capital, with effect from the year 2018-19. 

Nifty PSU Bank index has falled over 20% year-to-date after uncovering of the Punjab National Bank's Rs 129-billion scam.