The Hindu Business Line : Set-off against IFR funds, amortisation over years

According to banking sources, The Fixed Income Money Market and Derivatives Association (FIMMDA) approached the central bank to allow banks to make this move.

This was in view of heavy losses made in treasury operations as bond yields have shot up since the beginning of this fiscal, said dealers.

Losses were also incurred due to shift in some of the portfolios from the `available-for-sale' category to the `held-to-maturity'.

This proposal was put forth since bankers were concerned that large depreciation provisions this year would lead to lower valuations for the planned equity issues slated for this financial year. The second quarter results of banks revealed the Treasury casualty list.

Corporation bank had taken a hit of Rs 205 crore on account of provisioning for losses on transfer of securities to HTM portfolio, leading to an 81-per cent dip in profits. S

tate Bank of Travancore took a hit of 62.5 per cent on net profit, followed by Syndicate Bank with net profit down by 34 per cent.

UTI Bank reported a 28 per cent drop in the profit after booking loss of nearly Rs 114 crore on transfer of government securities from AFS to HTM. ING - Vysya Bank actually reported a Rs 29.2-crore net loss.

Amortisation of the hammering the banks suffered in their securities portfolio would amount to carrying forward the losses for a certain number of years, said the source. A loss of say Rs 100 crore made by the banks on account of treasury losses would be written off over a period of say three years, charging Rs 33.33 crore as a loss in balance sheet each year, the sources said.

Alternatively, the banks have sought amortising the losses over the residual maturity period of the respective securities. Presently, the amortisation is permitted only for the premium for the transfer of the securities from the AFS to the HTM category.

The proposal under consideration by banks as well as RBI was whether the operation should be done below the line or above the line in the profit and loss account.

It is understood that RBI is more in favour of allowing writing off of the losses after the net profit has been calculated taking the loss into account.

The banks want it to be above the line so that a part of the loss will be charged to the profit and loss account for the current period and the rest can be written off (amortised) over a period of time.

Some bankers have also suggested the Investment Fluctuation Reserve (IFR) maintained by banks be used to set off the treasury losses made.

A senior bank official said, "We are asking the central bank to allow banks to either use the IFR as provision for treasury losses, in case of banks which have parked a substantial amount in IFR. Banks that have not built up substantial IFR should be allowed to carry forward losses for a period of time, to be decided by consensus."

Resorting to the IFR would however impair the tier two capital. But the bankers said, only those with low capital to risk weighted ratios would be immediately affected.

This was because the large banks already have capital ratios in excess of 12 per cent. But even these banks would be eventually would require to be capitalised, the sources added.