Bond loss provision: banks seek time

Ask RBI to allow 2 quarters to make provisions; ICRA says Q3 mark-to-market losses touch ₹15,500 cr.

With yields on government bonds having spiked in the October-December quarter on expectation of fiscal slippage, banks will suffer mark-to-market losses in their bonds portfolio.

Banks have now written to the Reserve Bank of India (RBI) to allow them to spread provisioning requirement over two quarters.

Yield of the benchmark 10-year government bond rose as much as 67 basis points in the third quarter ended December. This would result in a mark-to-market loss of ₹15,500 for the banks, rating agency ICRA estimated.

“Banks are already reeling under the pressure of higher provisioning due to the accounts that are referred to the National Company Law Tribunal (NCLT) for resolution,” said a banker close to the development.

“In addition, there would be more provisioning requirement due to a rise in bond yields. So, we have requested the banking regulator to allow us to spread the losses [over] two quarters,” the banker added.

RBI has mandated 50% provisioning for all the cases that are referred to NCLT. Earlier, the decline in bond yields had resulted in windfall profits for banks, especially in the six quarters from Q4 of FY16 to Q2 of FY18, when banks made treasury gains of about ₹1 lakh crore, higher than the total profit before tax of ₹51,105 crore for the entire sector in the period, ICRA said.

However, yields started heading north in the third quarter as the government is now expected to breach the fiscal deficit target of 3.2%. In addition, consumer price index based inflation — the central bank’s key yardstick for policy purposes — hit a 17-month high of 5.21% in December. This would worry the central bank as it gets closer to the upper tolerance limit of 6%. RBI has kept interest rates unchanged in the last policy meeting in December while maintaining a neutral stance. The next monetary policy statement is scheduled for February 7.

More recap needed?

“PSBs are likely to account for 80% share of overall MTM losses as per our estimates,” said Karthik Srinivasan, group head, Financial Sector Ratings, ICRA. “With losses before tax of ₹5,624 crore during first half of FY18, MTM losses will further... erode capital ratios for PSBs. With an unexpected surge in yields..., the GoI may need to increase the capital it intends to frontload into PSBs by recapitalisation bonds.”