Mumbai, April 2, 2018
The Reserve Bank today allowed banks to spread provisions for bond losses in the third and fourth quarters of FY18 over the next four quarters.
The central bank said the provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss was incurred. “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 today.
The move comes as a big breather for banks which have been fighting record bad loans on top of the massive spike in bond yields since the past two quarters. Fater falling into under 6.4 per cent the benchmark bonds have been trading around 7.5 per cent since last November. The bad loans in the system has crossed more than 10.5 per cent or over Rs 11 trillion and rating agencies today
warned that it will cross 11.5 per cent this year mid-way before improving to settle at 10.5 per cent.
Rating agencies had pegged investment losses at over Rs 15,000 crore in the December quarter alone while the whole year is yet to be ascertained. In FY17, banks had made huge gains to the tune of over Rs 1 trillion. The central bank notification said the bank which is
utilise the option, will have to make disclosures in their quarterly results.
“Banks have to provide details of provisions for depreciation of the investment portfolio for the third and fourth quarters made during the quarter/year and the balance required to be made in the remaining quarters,” the apex bank notification said. Banks are required to MTM the individual scrips in AFS at quarterly or more frequent intervals and HFT at monthly or more frequent intervals and provide for net depreciation.
The apex bank also advised banks to create an investment fluctuation reserves (IFR) from the current year to build up adequate reserves to protect against any increase in yields in future. For creating IFR, banks will have to transfer an amount not less than the net profit on sale of investments during the year or net profit for the year less mandatory appropriations, whichever is lower.
“Banks will have to transfer the amount until the amount of IFR is at least 2 per cent of the HFT and the AFS portfolio, on a continuing basis. Where feasible, this should be achieved within three years,” the notification said. A bank may, at its discretion, draw down the balance available in the IFR in excess of 2 per cent of its HFT and AFS portfolios, for credit to the balance of profit/loss as
disclosed in the profit and loss account at the end of any accounting year.
If the amount in IFR is less than 2 per cent of the HFT and AFS investment portfolios,a drawdown will be permitted if the amount is used only for meeting the minimum CET1/tier 1 capital requirements and the drawdown is not more than the extent of the MTM provisions made during the aforesaid year and does not exceed the net profit on sale of investments during that year. The IFR shall be eligible for inclusion in tier 2 capital, the notification added.
[The Financial Express]