PSU banks in demand

Shares of 18 state-run banks rose by 0.31% to 3.97% at 10:55 IST on BSE after the Reserve Bank of India allowed banks to spread bond trading losses over four quarters.

Punjab & Sind Bank (up 3.97%), Union Bank of India (up 3.21%), Bank of India (up 2.78%), Syndicate Bank (up 2.75%), Bank of Baroda (up 2.68%), Corporation Bank (up 2.43%), State Bank of India (up 2.23%), Indian Bank (up 1.91%), IDBI Bank (up 1.83%), UCO Bank (up 1.60%), Dena Bank (up 1.57%), Canara Bank (up 1.29%), Bank of Maharashtra (up 1.09%), Central Bank of India (up 0.99%), Vijaya Bank (up 0.85%), Allahabad Bank (up 0.60%), United Bank of India (up 0.54%) and Punjab National Bank (up 0.31%), edged higher.

The S&P BSE Sensex was down 51.87 points, or 0.16% at 33,203.49.

The Reserve Bank of India (RBI) notified yesterday, 2 April 2018, that with a view to addressing the systemic impact of sharp increase in the yields on Government Securities, it has decided to grant banks the option to spread provisioning for mark to market (MTM) losses on investments held in Available for Sale (AFS) and Held for Trading (HFT) for the quarters ended 31 December 2017 and 31 March 2018. The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.

Bond yields have spiked over the past few months on concerns of excess government bond supply. As bond prices are inversely correlated to yields, there was a possibility of banks facing huge provisioning burden towards bad loans in the fourth quarter.

Further, 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 2018-2019.

As for an IFR, the RBI said the investment reserve should be at least 2% of the HTM and AFS portfolio. An amount not less than the lower of the net profit on sale of investments during the year; and the net profit for the year less mandatory appropriations, should be transferred to IFR; and where feasible, reserve should be built up within three years.

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