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Rising gilt yields: Urban co-op banks want RBI's intervention

Sarbajeet K. Sen

New Delhi , Aug. 27

EVEN as the Reserve Bank of India grapples with ways to ease the impact of rising yields on commercial banks, another major segment of the financial sector is craving for the central bank's attention on the same count.

The Urban Cooperative Banks (UCBs) have sought the RBI's intervention to halt the negative impact of the rising yields of their gilts portfolio.

"With interest rates firming up and the yields falling sharply in the last six months, the banks are now faced with the difficult task of making provisions for depreciation on `available for sale (AFS)' and `held for trading (HFT)' categories of investments," the National Federation of Urban Cooperative Bank and Credit Societies (NAFCUB), the apex UCB body, has said in a recent communication to the RBI.

The missive comes at a time when the issue of rising yields and its adverse impact on banks' bottom-line are high on RBI's agenda. In fact, the central bank had met representatives of the Indian Banks' Association (IBA) and other participants in the debt market during the current week to discuss the entire issue.

NAFCUB has requested the RBI to ease the investment norms for 2004-05 to allow all UCBs to categorise gilts holding of up to 25 per cent of their net demand and time liabilities (NDTL) as `Held to Maturity (HTM)'. UCBs are presently allowed to categorise only 25 per cent of investment in gilts as HTM.

While banks do not have to make any provision for depreciation for gilts placed in HTM category, they have to do so for the other two categories.

For the smaller UCBs, the federation has said that for the next five years "all urban banks with NDTL of less than Rs 25 crore be permitted to categorise their entire portfolio on HTM basis." Banks having NDTL of above Rs 25 crore should be allowed to hold 50 per cent of their investment in HTM category for the five-year period. It has said that this would allow banks to "settle down and gain some expertise in the G-sec investments."

"The depreciation in investment issue comes on top of the difficulties they (UCBs) are already facing on account of the application of the 90-day impairment norm (for classifying non-performing assets), which a number of banks are finding it difficult to comply with," NAFCUB has said.

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