The Reserve Bank of India’s Deputy Governor Viral Acharya has come down heavily on banks for asking dispensation periodically to minimise losses on their bond portfolio due to rise in yields.
“Interest rate risks of banks cannot be managed over and over again by their regulator,” Dr. Acharya said in his address to bankers at the Fixed Income Money Markets and Derivatives Association’s (FIMMDA) annual dinner on Monday.
“Banks should not be surprised repeatedly when government bond yields rise sharply and their investment profits drop. RBI’s Financial Stability Reports (FSR) have regularly pointed out the impact of such large interest rate moves on capital and profitability of banks. Banks should know and understand this risk rather well. Perhaps they do, and the issue is really one of incentives that lead to their ignoring this risk,” Dr. Acharya said.
He said some banks have again requested the RBI for dispensation to adopt in the current phase of rising yields, wherein yields have climbed from about 6.5% at the end of August 2017 to about 7.45% now. The recourse to such moves is akin to using steriods, Dr. Acharya noted.
‘Adverse effects’
“The regulator, in the interest of financial stability, is caught in such situations between a rock and a hard place, and often obliges… Recourse to such asymmetric options — heads I win, tails the regulator dispenses — is akin to the use of steroids. They get addictive and have long-term adverse effects in the form of frequent relapse even though their use may be justified to relieve occasional intense pain,” he added.
The share of commercial banks in outstanding government securities (G-Secs) is about 40% as of June 2017. Investment by banks in G-Secs as a percentage of their total investment was about 82% for FY17.
Dr. Acharya said the risks could be managed more nimbly by availing of hedging markets. While public sector banks account for about 70.6% of banking sector assets, their participation in hedging markets is limited or negligible, he said.
