Mumbai, April 2 - The Reserve Bank of India (RBI) on April 2 eased the provisioning norms for bond losses incurred by banks in the third and fourth quarter of 2017-18, allowing them to spread these over four quarters.
In a notification, the RBI also asked commercial banks to create an Investment Fluctuation Reserve (IFR) so as to build up adequate reserves as protection against increase in yields in future.
"It has been decided to allow banks the option to spread provisioning for mark-to-market (MTM) losses on investments held in AFS (available for sale) and HFT (held for trading) for the quarters ended December 31, 2017 and March 31, 2018.
"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 notification said.
The RBI said this relaxation is being made "with a view to addressing the systemic impact of sharp increase in the yields on Government securities (G-Secs)", but however, placed certain conditions for banks that utlise the option to spread the provisioning for these two quarters.
The banks have been asked to "make suitable disclosures in their notes to accounts/quarterly results providing details of the provisions for depreciation of the investment portfolio for the quarters ended December 2017 and March 2018 made during the quarter/year, and the balance required to be made in the remaining quarters".
Yields had risen 67 basis points in the quarter ended December 2017, pullin down bond prices as a result.
Further, with a view to building adequate reserves to protect against increase in yields in future, the regulator asked all banks to create an IFR with effect from fiscal 2018-19.
"An amount not less than the lower of the net profit on sale of investments during the year and net profit for the year less mandatory appropriations shall be transferred to the IFR, until the amount of IFR is at least 2% of the HFT and AFS portfolio on a continuing basis.
"Where feasible, this should be achieved within a period of 3 years," the RBI said.
"A bank may, at its discretion, draw down the balance available in IFR in excess of 2% of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year," it added.
The central bank also said that IFR shall be eligible for inclusion in Tier-2 capital - the secondary, or supplementary, component of bank capital, which in addition to Tier 1 makes up a bank's required reserves.
The RBI's latest move is designed to mitigate banks' losses and help boost their fourth quarter profitability, which has been majorly impacted by the non-performing assets (NPAs), or bad loans, accumulated in the system and have crossed the staggering level of Rs 9 lakh crore.