RBI allows banks to spread bond trading losses over four quarters
The Reserve Bank of India took a U-turn in its rigid position on provisioning norms for banks suffering losses from bonds trading by permitting the lenders to spread out their trading losses over four quarters that would save them from scrambling for funds to meet provisioning norms on bankrupt cases.
To avoid returning to similar position in future, the central bank has said that banks should create Investment Fluctuation Reserve that could be dipped into in case there is a need to provide for bond losses in the years ahead.
“With a view to addressing the systemic impact of sharp increase in the yields on government securities, it has been decided to grant banks the option to spread provisioning for mark-to-market (MTM) losses on investments held in Available for Sales and Held for Trading,’’ RBI said in a statement. “The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.”
The regulatory forbearance comes after yields spiked in the last two quarters of the fiscal ended March 31. At one point towards in December, bond yields have soared more than 100 basis points, inflicting heavy losses on the bond portfolio of banks. Bond yields and prices move in opposite direction.
But the prices have since risen after the government announced a borrowing programme that was palatable to bond markets. The steepest losses came in the December quarter. Latest provisioning norms is a change in the RBI’s stance which pushed back requests from the banking industry for leniency in provisioning in January when even the State Bank of India had to report its first quarterly loss in 17 years for the December quarter.
“Interest rate risk of banks cannot be managed over and over again by the regulator,” Deputy Governor Viral Acharya told a bonds association meeting. “The regulator, in the interest of financial stability, is caught in such situations between a rock and a hard place… Recourse to such asymmetric options – heads I win, tails the regulator dispenses – is akin to the use of steroids.”
Any rigidity in RBI’s stance may have inflicted heavy losses on banks again in the March quarter and the capital the government provided may have been swallowed by provisioning for treasury losses rather than strengthening the balance sheet. “Spreading of MTM losses does provide some comfort for banks in terms of reducing losses and hence gives a leeway to have benefit towards reported capital numbers,” said Udit Kariwala, associate director, financial institutions, India Ratings & Research.
“As per our estimates, a large part of the capital announced under bank recapitalisation programme would have been consumed towards absorbing treasury losses. The benefit is more shortterm and structurally doesn’t benefit PSU banks capital cause.’’ The central bank has also come up with a latest measure aimed at checking erosion of profits in future. “Further, with a view to building up of adequate reserves to protect against increase in yields in future, all banks are advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19,” RBI said.
The Economic Times, New Delhi, 03rd March 2018
Comments
Post a Comment