Markets

How RBI aids banks to trim bond losses

MUMBAI: The Reserve Bank of India remains kind to banks, relaxing provisions for bond losses once again.

The RBI has extended the lifeline to state-owned banks, which face a double-whammy of treasury and loan losses.

The central bank has allowed them to spread their mark-to-market losses incurred in the April-June quarter equally over the next four quarters, a move that will help protect their dwindling profit margins.

“It has been decided to grant banks the option to spread the mark-to-market losses on investments held in Available for Sale (AFS) and Held for Trading (HFT) portfolio for the quarter ending June 30, 2018, equally over a period of four quarters, commencing from the quarter ending June 30, 2018,” the RBI said in its bi-monthly policy statement.

If a bank incurs a loss of Rs 100 crore in the three months ended June, it can set aside Rs 25 crore over each of the next four quarters.

Bond yields have been rising, pulling prices down. In the past one year, the benchmark government bond yield has surged about 128 basis points.

In January, a group of state-owned banks approached the RBI seeking exemption from recognising mark-to-market losses on their government bond portfolios in the December quarter.

The BSE Bankex, a barometer of bank stocks, gained 0.6% at the close on Wednesday, following the RBIs policy announcement. State-owned banks collectively have less weightage on the index than their private sector peers. The gains on the index were led by State Bank of India, Punjab National Bank and Bank of Baroda.

In the wake of the spurt in the yields of government securities, banks were given an option to spread, over four quarters, the mark-to-market losses recorded on their investment portfolio during the quarters ended December 2017 and March 2018, RBI said.

Banks were also required to build an Investment Fluctuation Reserve of 2% of their holdings in the AFS and HFT categories to avoid such eventualities.

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