Re-Appearing Profits

It must be remembered, however, that a mark to market system of valuation of securities implies both downward and upward revisions in their value. This needs to be differentiated from the normal concept of depreciation, which means an irreversible fall in the value of something due to wear and tear. In the case of securities, there is no wear and tear, but natural fluctuation in value. The accounting practice only ensures that the net realisable value of the security on balance sheet date is taken into account. It stands to reason that when a loss in value is accounted for as a charge, a similar treatment should be available for profits too. In fact, with these changes, the RBI is only pushing banks towards marking a larger proportion of their portfolio into the current category, as against the mandated requirement that they mark 50 per cent to market. With the provision that notional profits can be brought into books of account, banks would be inclined to take a one-time hit and shift a larger proportion of their portfolio to the current category. The SBI, for instance, took the largest hit last year from rising yields (which equate to falling prices) because it marked 65 per cent of its stock to market. Now that the tide has turned, it stands to gain by the largest amount.

While goading banks may be one objective of the move, the larger implication seems to be the RBI's strong signal that interest rates at the long end (ten years) are definitely moving down. It may take some time for bond markets to accept this signal, because secondary market yields have tended to be sticky and yields thrown up in medium term paper auctions have sent out conflicting signals. This is in large measure due to the imperfections in the market and primarily the absence of active trading across all maturities. But as banks are forced to mark their entire portfolio to market