Market To Market Privilege On Government Security To Boost Bank Profits - RBI
7 May 2018: The Reserve Bank of India is likely to give banks yet another margin in estimating for their losses in government securities, potentially saving them hundreds of crores in terms which will ultimately benefit their bottom line. Banks are likely to be exempted from valuing their government bond investments which are part of the administrative required Liquidity Coverage Ratio (LCR) at the market value. This exemption could be the latest in a series of steps taken by the central bank to ease banks’ pain after a sharp rise in bond yields and continuing stress due to high non-performing assets.
RBI had permitted banks to spread out their trading losses over a four-quarter period, saving them thousands of crores in provisioning expenses in early April. Bankers say allowing MTM exemption this quarter will be a big relief for banks because it will save hundreds of crores in provisions. “Most of the LCR investments are in government bonds because that is a high quality liquid asset. Most banks also have excess SLR investments which are counted for LCR. The savings due to this exemption from MTM will be in hundreds of crores for banks,” said Arun Khurana, head of treasury at IndusInd Bank.
Banks have been hit by huge losses in April after minutes from RBI’s financial policy committee meeting indicated that a rate increase is closer than previously thought. The 10-year benchmark bond yield has jumped 60 basis points to 7.73% from 7.13% after the minutes of the review meeting were revealed. “Banks which have government bond investments beyond their SLR requirements, especially in the held-to-maturity category, will benefit more,” said MS Gopikrishnan, head, financial markets at Standard Chartered. The concept of LCR is a relatively new one and has come into being in light of the 2008 financial crisis which forced regulators to think about liquid investments for banks which can be used in case of a crisis.
According to the LCR rule, banks have to invest a part of their deposit and loan outflows within a 30-day period into the so-called high-quality liquid asset which could be government securities or treasury bills. The RBI’s move will ensure that banks do not have to provide for the investments counted as LCR giving them a provisioning relief of hundreds of crores in the first quarter of this fiscal. “However, it remains to be seen as to how the RBI separates these LCR investments from normal SLR because some part of SLR is now allowed to be counted as part of LCR,” said a senior banker.