Mumbai – The Reserve Bank of India’s move allowing banks to spread their losses arising from treasury operations over four quarters along with reduction of provision requirement on loan accounts referred to NCLT are likely to provide crucial support to balance sheets of lenders at a time when most of them are reeling under rising requirement of loan loss provisions.
In a significant move, the central bank last week allowed banks to spread mark-to-market (MTM) losses emanating from bond trading in the third and fourth quarters of this financial year over the next four quarters.
“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 the available-for-sale (AFS) and in the held-for-trading (HFT) for the quarters ended December 2017 and March 2018,” RBI said in a notification on April 2.
The decision is likely to support profitability of banks which had witnessed heavy losses from treasury operations in the third quarter of the current financial year due to sharp surge in bond yields.
10-year benchmark government yield jumped 67 basis points in the third quarter ending December 2017, resulting in huge treasury losses for banks. According to an ICRA report, the MTM losses for the entire banking sector was estimated to be Rs 15,500 crore during the third quarter of current financial year.
“With the RBI allowing banks to spread treasury losses over four quarters, we feel around Rs 7,000-Rs 8,000 crore of write back is likely by the entire banking system,” Group head- Financial sector ratings at rating agency ICRA, Karthik Srinivasan told The Finapolis.
This definitely provides breathing space for banks which will report their annual results in the March quarter, he added.
Meanwhile, the RBI had also advised banks to create an investment fluctuation reserve (IFR) which will act as a cushion against any future losses arising from increased bond yields.
Apart from the banking regulator’s move allowing spread of MTM losses, RBI has also temporarily relaxed provisioning norms for accounts referred to NCLT.
According to the revised norms, banks now have to keep a provision of 40% on loan accounts referred to the National Company Law Tribunal (NCLT), down from 50% earlier. This relaxed norm will remain operational till the end of June quarter of next financial year.
Analysts are of the opinion that this temporary move will lessen the burden of provisioning amount for Indian banks. “Around Rs 40,000 crore will be freed up for Indian banks post this move of RBI. However, as this step is temporary in nature, banks may not claw back provisioning amount,” Srinivasan of ICRA said.