Banks: Banks may seek exemption to amortize MTM losses on bond holdings in Q1

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MUMBAI: Amid falling bond prices, hike in off-cycle rates in May and huge valuation losses, the high road banks They are caught in a debate whether to seek help from the regulator to mitigate this shock in the first quarter of the current financial year.

Several banks met last week to discuss possible representation of the Reserve Bank of India (RBI) to allow them to reduce ‘mark to market’ (MTM) losses. bond holdings in the first quarter of the full year. such discount. permitted by reserve Bank of India Will let banks spread losses and use them in the past Capital more profitably.

Banks may seek exemption on bond holdings in Q1 to reduce MTM lossesagencies

A bank’s ‘other income’ in MTM accounting practice includes booking losses arising from the difference between the price at which a security was purchased and the market price. Thus, higher MTM losses, as a result of lower bond prices (and higher bond yields), reduce other income and the bank’s ‘operating profit’.

The benchmark bond yield has risen from 6.84% on March 31 to around 7.6% currently. The 10-year bond, which yielded 6.84% in March, with a face value of 100, would see its price fall by Rs 6.50 if the yield increased by 100 basis points.

Banks have to keep their government and corporate bond investments in three baskets – ‘Hold to Maturity’ (HTM), ‘Available for Sale’ (AFS), and ‘Held for Trading’. Up to 22% – which was temporarily increased to 23% – the bank’s net demand and time liability can be classified as HTM which does not require accounting for the MTM loss. MTM lossHowever, for securities in the other two baskets to be included. Once a year, during the first quarter of a financial year, a bank is permitted to transfer securities from HTM to another basket.

“At a time when the demand for credit is gradually increasing, a large MTM loss will affect the pricing power of banks for loans. In the pandemic years, when there was low credit growth, banks had taken short- and medium-term investments in the government. Investments were deposited. Paper and other major securities like NABARD and SIDBI bonds. Many banks, especially some PSU banks and some private banks, are sitting on MTM losses and there is no exit route… This was a matter of discussion, Said a banker.

However, no decision has been taken on whether the industry body will pursue the matter with the regulator. Another person said, “There is doubt whether RBI will relax norms. Everyone knew that bond yields have to rise with inflation. If (benchmark) yield touches 7.75%, it will be for some banks.” There will be a problem.”

One of the large PSU banks has asked industry association to suggest to RBI that MTM loss should be shown under the head ‘Provisions and Contingencies (Provisions for Depreciation of Investment)’ instead of being included under ‘Other Income’. would be prudent. , “The on-line treatment of MTM will leave banks untouched with these losses. This will be reflected only in the net profit numbers. Many analysts value operating profit, which captures core performance,” said an analyst. he said. ,

According to another industry source, some banks may seek RBI’s nod to draw from ‘investment fluctuating reserves (created from Treasury profits)’ to add to the ‘free reserves’ and capital. HTM holding by banks to be brought down to 19.5% of net demand and time liabilities by the quarter ended June 2023.

As per RBI data, the total investment of banks in G-Secs till June 3 was Rs 48.4 lakh crore. The AFS portfolio is estimated to be around 25%; However, the extent of depression will vary from one bank to another depending on the composition of the portfolio.

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