The Hindu Business Line : PSBs may mark to market entire securities portfolio

No distinction
The current Basel-II capital standards guidelines do not distinguish between HTM and marked to market categories
Besides, investments are almost entirely marked to market under the prevalent global standards

Bangalore , Sept. 28

Public sector banks in the country have begun to brace themselves for the possibility that their entire securities portfolio would have to be marked-to-market to make themselves Basel II-compliant.

High level banking sources said that this implied that securities falling under the held-to-maturity (HTM) category, currently valued on an acquisition cost basis, would have to be marked-to-market. This includes the entire portfolio of securities that comprise part of the Statutory Liquidity Ratio (SLR) of 25 per cent.

Marked to market

The current Basel-II capital standards guidelines do not distinguish between HTM and marked-to-market categories. Besides, investments are almost entirely marked to market under the prevalent global standards. In fact, bankers said that initially many of them had opposed marking to market of investments and had accordingly represented it to the Reserve Bank of India.

However, bankers said that they were fully reconciled to the possibility that "there cannot be piecemeal compliance to Basel II."

The bankers said that one of the reasons for full compliance was because almost all domestic banks, particularly the public sector banks, nurtured ambitions of becoming large global players. This was particularly expected after 2009, when foreign-owned banks would also be allowed to merge and acquire domestic banks.

Many of the domestic banks already have a high marked-to-market category of investments. This included some of the large private sector banks. Some have already taken the depreciation hit by keeping a high marked-to-market category. This was also because implementation of the guidelines was expected to come into effect from the next financial year.

LOW TENURES

Besides, many of the banks have taken steps to shrink the average tenure of their investments to less than two years. The private sector banks' average tenure of investments including the statutory liquidity ratio (SLR) portfolios is under one year. But the public sector banks have brought down their tenures to less than two years.

The marked-to-market papers that include both the `Available for Sale' and the `Held for Trading' categories tenures for PSU bankshave a tenure of less than one year. Bankers said even the average tenures would come down further next year on their respective HFT categories as well.

Derisking strategy

The reduction in tenors, bankers said, was part of a derisking strategy, and it would also help the banks avert high depreciation charges on their investments. In a rising interest situation, long tenor securities tend to depreciate the highest while the least affected are short tenor securities. The sustained derisking clearly had paid dividends as was evident from the healthy bottom lines in the first quarter of the last financial year. Softening yields were also supporting banks, the bankers said. Ten-year yields are down to a six-month low of 7.55 per cent. Yet, expectations were that there would only be a phased migration to international standards in market risks.

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