The Hindu Business Line : Depreciation on investments, zero NPAs

Sources said that the weaker ones were likely to face bottom line pressure in the second quarter if the investments continue to lose value. Banks are expected to provide for depreciation on securities - - available for sale and held for trading.

Only in the held-to-maturity category of securities, which is expected to comprise a minimum of 25 per cent of the portfolio, banks need not provide for any depreciation. In anticipation of the depreciation, some banks have already begun getting rid of some low coupon securities, which were picked up at par early this year and late last year. These include the 5.64 per cent 2019 and the 5.59 per cent 2016.

From 2001 onwards, few banks have provided for depreciation on securities. Instead, most of them have used the profits earned from treasuries to provision for their non-performing assets. This was in view of the appreciation in the value of investments.

The ten-year yield to maturity in May 2001 was about 10 per cent and had dropped to a low of 5.1 per cent early this year. However, since May ten-year yields had been on the ascent and gone up by over one per cent. Traders said the acquisitions made at low yields were now expected to face substantial depreciation.

They said that many of the large public and private sector banks were in a position to absorb the depreciation of the value of the securities as some of them already have a cushion in the form of Investment Fluctuation Reserve (IFR).

The RBI had prescribed an IFR of 5 per cent of the value of the investment portfolio. This figure was to be achieved before April 2006, though the RBI has consistently persuaded all the banks to advance the deadline by at least a year. IFR was to be provided out of treasury profits, they said.

Some of the public sector banks, the sources said, had already reached a figure of 3 per cent of IFR. These banks were not likely to be affected even if the yields move down further. Only banks with shortfalls in IFR are likely to face problems.

The depreciation on securities is likely to impact the results of the current quarter, especially in the case of weaker banks. The banks face the pressure of cutting their net non-performing assets to zero, in addition to depreciation, they said.

There are fears that if the yields move further southward during the next few months, the pressure on depreciation of investments is likely to mount for most of the banks. This fear stems from the bunching of borrowings in the financial markets.

Normally, bulk of the Government borrowings are completed during the lean period of the season. This year, the borrowings are taking place only in the second half. In addition to this, corporate borrowings also start during this period.

The combination of these borrowings, the bankers said, were likely to put pressure on liquidity, especially since reserve money expansion through foreign currency inflows has tapered off.