The Hindu Business Line : Treasury profits decline for banks, FIs, insurers

WITH prices of government securities falling, banks and financial institutions are likely to fall short of the dividend targets estimated for the current fiscal year.

This year, the Government had estimated dividend receipts from the public sector banks, financial institutions, insurance companies and the Reserve Bank of India at Rs 5,896 crore. But sources said that these estimates were made in February 2004, when the ten-year yield to maturity (YTM) on government securities was less than 5.2 per cent.

Throughout the last two years, the banks and financial institutions exceeded the Government'sdividend expectations on account of large profits earned in treasury operations. Treasury profits have dropped for all the banks since the beginning of this year, with the slowdown in current account flows into the country. The ten-year YTM was now expected to breach the 7 per cent level, bankers said. This would leave banks with large depreciation provisions, they said.

Besides, none of the banks has so far been allowed to make depreciation out of the investment fluctuation reserve (IFR). Most of the public sector bankers have been demanding that they be allowed to use the IFR for making depreciation. This was to ensure that the pricing of their proposed equity issues was not affected.

Moreover, bankers said that this year most banks were using the resources to strengthen their capital. Under the current guidelines principal receipts would have to be written back to the capital. Only interest and the penal levies are allowed to be written to the profit and loss account.

They said that in some of the cases especially in corporate loans, the recoveries were largely in the form of principal and very little in the form of interest. As a result, most of them were using the resources to beef up their capital ahead of the Basel II norms.

But it is not the public sector banks alone that are expected to incur slippages in meeting dividend expectations. Even the Reserve Bank of India is expected to face a reduction in treasury profits this year. This is partly on account of the sharp depreciation of the US dollar in the international markets.

Besides, traders said the lower profits were also due to some depreciation suffered by the RBI on account of the hikes in the Federal Fund Rates. These hikes have resulted in some depreciation of the RBI's holdings of US government securities, banking sources said.

Moreover, all the four public sector insurance companies are also expected to show lower profits this year. This is because of the larger provisions required for unexpired risks. Moreover, claims that had been contained for most part of this year are expected to escalate partly due to natural calamities. Non-life insurers have estimated that claims could be in the region of about Rs 1,000 crore and only about 50 per cent of it is reinsured.

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