Surge In Gilt Yields To Hit Banks: Verma

"It will be an extremely difficult year for the industry as the rates (of government securities) are rising," Verma, who is currently the chairman of IDBI Bank, said yesterday.

"Traditionally, the investment portfolio accounts for about 50 per cent of the total assets of the banks. I know investments of some of banks are even around 52-55 per cent of their total asset base. With the rising yield of government securities, banks will be required to have a huge provisioning which will eat into profits," Verma said.

Going by the Reserve Bank of India stipulation, all commercial banks are required to take 25 per cent exposure in SLR holdings. "The rising yields (of SLR securities) will impact all banks. The new private sector banks which have 100 per cent current portfolio will also be required to make provisions as the rates are going up," Verma pointed out.

 

The banking sector gained substantially over the last two years on account of lowering of year-end yield to maturity (YTM) of government securities. While some of the banks have used the appreciation (in security prices) to boost their bottomlines others have created special reserves out of the benefit to absorb future shocks.

On an average, yields of government securities went up by around 100 basis points across all maturities between April and August this year. For instance, the benchmark 10-year paper's yield went up from 10.44 per cent in early April to 11.43 per cent in mid-August. The YTM of the ten-year paper dropped by 115 basis points last year.

"If the trend (of rising yield) continues for the rest of the year, the banks will find it difficult (to post healthy profit)," said Verma.