Softening G-Sec yields positive for banks: ICRA

The likelihood of treasury losses for banks for the January-March quarter has significantly reduced as the 10-year benchmark Government Security (G-Sec) yield softened on Tuesday following the government announcing some key changes in its borrowing programme for FY2019, according to credit rating agency ICRA.

The expectations of upward pressure in deposit and hence, lending rates, will now ease to some extent.

The key changes in the borrowing programme announced by the Government on March 26, include reduction in the overall borrowing for FY2019, reduced borrowing during the first half of FY2019, and lower share of 10-14-year G-Sec issuances.

The 10-year benchmark G-Sec yields cooled off by 28-29 basis points on Tuesday to 7.33-7.34 per cent. Earlier this month, the yields touched a high of 7.78 per cent, up 46 basis points from the level of 7.32 per cent at the end of the October-December quarter.

Recalibration of the borrowing programme is positive for banks and borrowing costs for India Inc, ICRA said in a statement.

Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, said: “The cooling off in G-Sec yields is likely to have a two-fold impact for banks. First, the likelihood of treasury losses during the fourth quarter has significantly reduced, and second, the expectations of upward pressure in deposit and hence, lending rates, will now ease to some extent.”

Given that interest rates on small saving schemes of the Government of India are linked to the 10-year G-Sec yields, and with increase in yields during Q4, Srinivasan observed that the likelihood of a hike in these rates was increasing. A hike in small saving rates would have stoked a hike in deposit rates by banks and consequently their lending rates, he added.

The surge in 10-year G-Sec yields from 6.51 per cent at the end of Q1 (April-June) FY2018 to 7.32 per cent at the end of Q3 FY18 also resulted in an increase in yields of corporate bonds and impacted the corporate bond issuances with year-on-year degrowth in fresh bond issuances by 14 per cent and 24 per cent during Q2 (July-September) FY2018 and Q3FY2018, respectively.

Karthik said, “Softening in G-Sec yields will also have a positive impact on corporate bond yields and support the growth of the corporate bond markets, while resulting in lower cost of funds for entities reliant on wholesale funding, like NBFCs and large corporates.

“Easing of upward pressure on bank lending rates as well as softening of corporate bond yields will also augur well for corporate profitability and their debt servicing ability.”

MTM provisions

In a statement on March 8, ICRA said the mark-to-market (MTM) provisions on bond portfolios for public sector banks (PSBs) during Q3 FY2018 surged with the rising bond yields.

The agency assessed that 18 PSBs (for which data is available) reported MTM provisions of ₹11,100 crore on their investment portfolios during Q3 FY2018. The treasury losses, net of MTM provisions for the banks, stood at ₹5,600 crore compared to a profit of ₹31,100 crore during H1 (April-September) FY2018.

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