RBI declines banks’ proposal on treasury loss provisioning

The lack of a dispensation will hurt public sector banks (PSBs) more, given their higher holding of government securities of longer tenor.

The Reserve Bank of India (RBI) has turned down a proposal to let banks spread provisions against their treasury losses in the June quarter over four quarters. The central bank last week conveyed its decision in a written communication to banks who had sought the concession, according to well-placed sources.

An email sent to the RBI seeking its response remained unanswered till the time of going to press.

Rising bond yields may cause Indian banks to incur mark-to-market (MTM) losses of up to Rs 13,000 crore in their bond portfolios in the quarter ended June 2022 (Q1FY23), according to Icra.

The lack of a dispensation will hurt public sector banks (PSBs) more, given their higher holding of government securities of longer tenor.

Icra estimates MTM losses on bond portfolios to range between Rs 8,000-10,000 crore for PSBs and Rs 2,400-3,000 crore for private banks in Q1. Anil Gupta, vice president, Icra, said that despite the expected MTM losses, net profits of banks will remain steady, with the treasury losses being offset by an expected growth of 11-12% in their core operating profits in FY23. “However, if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY2023,” Gupta said.

People familiar with the RBI’s thinking said that the central bank believes it has done enough to protect bank treasury books from the effect of rising yields by not launching the standing deposit facility (SDF) before April.

According to the June 2022 edition of the financial stability report (FSR), banks’ trading profit recorded a marked reduction after Q1FY22. During Q4FY22, it fell by 17% on a sequential basis for PSBs, while it increased for private banks. Foreign banks reported trading losses for the fifth consecutive quarter, with trading losses increasing in Q4FY22.

Banks are required to mark down their available for sale (AFS) and held for trading (HFT) bond portfolios on a quarterly basis to account for declines in the valuation of their holdings. In case of MTM losses, they must make provisions against these losses, which hurts their profitability.

The repo rate hike of 90 basis points (bps) in May and June, accompanied by other measures aimed at the withdrawal of system liquidity, have led to a sharp rise in yields during the current quarter. Between March 31 and July, the yield on the benchmark 10-year government bond has risen 59 basis points (bps) to 7.466%.

The FSR said that during FY22, PSBs preferred to augment their allocation in state development loans (SDLs) and wind down their other holdings in the HTM category. Under the then prevailing low interest rate conditions, banks sold a large portion of their HTM portfolio and booked profits.

“Since G-Secs form the largest share of the HTM portfolio, the presence of substantial unrealised losses, especially in respect of PSBs, at the beginning of the interest rate tightening cycle, portends risk to their financial health going forward,” RBI said in the FSR.