Several banks met last week to discuss a possible representation to the Reserve Bank of India (RBI) for allowing them to amortise the ‘mark to market’ (MTM) losses on bond holdings of the first quarter over the entire year. Such a dispensation allowed by RBI in the past would let banks spread the loss and use their capital more profitably.
The MTM accounting practice involves booking the loss – arising from the difference between the price at which a security was purchased and the market price – in the bank’s ‘other income’. Thus, higher MTM loss, resulting from lower bond prices (and higher bond yields), shrinks other income and a bank’s ‘operating profit’.
The benchmark bond yield is up from 6.84% on March 31 to around 7.6% at present. A 10-year bond yielding 6.84% in March, with a face value of ₹100 would see its price fall by ₹6.50 if the yield rises by 100 basis points.
Banks have to park their government and corporate bonds investments in three baskets – ‘held to maturity’ (HTM), ‘available for sale’ (AFS), and ‘held for trading’. Up to 22% – which was temporarily raised to 23% – of a bank’s net demand and time liability can be categorized as HTM which requires no accounting of MTM loss. The MTM losses, however, have to be absorbed for securities in the other two baskets. Once a year, anytime during the first quarter of a fiscal, a bank is allowed to shift securities from HTM to the other baskets.
“At a time the demand for loans is slowly picking up, a large MTM loss would impact the pricing power of banks for loans. In the pandemic years, when there was little credit growth, banks had accumulated short and medium-term investments in government papers and other prime securities like Nabard and Sidbi bonds. Many banks, particularly some of the PSU banks and a few private banks, are sitting on MTM loss with no exit route…This was the subject of discussion,” said a banker.
However, no decision has been taken on whether the industry body would pursue the matter with the regulator. “There are doubts whether RBI would relax the rules. Everyone knew that bond yields had to rise with inflation. If the (benchmark) yield touches 7.75%, it would be a problem for some banks,” said another person.
One of the large PSU banks has asked the industry association to suggest to RBI that it would be more prudent to show the MTM loss under the ‘provisions and contingencies (provision for depreciation of investment)’ head instead of including it under ‘other income’. “A below the line treatment of MTM would keep banks’ operating profit untouched by these losses. It would then only be reflected in the net profit number. Many analysts attach significance to the operating profit, which captures the core performance,” said an analyst.
According to another industry source, some banks may seek RBI’s permission to draw down from ‘investment fluctuation reserve (created out of treasury profits) to add to ‘free reserves’ and capital. The HTM holding has to be brought down by banks to 19.5% of net demand and time liabilities by the quarter ending June 2023.
The total investment of banks in G-Sec was ₹48.4 lakh crore as of June 3, as per the RBI’s data. About 25% is estimated to be AFS portfolio; however, the extent of depression would differ from bank to bank depending on the portfolio’s composition.
