Spreading MTM losses: RBI’s move a breather for banks in Q4

The RBI’s move to allow banks to spread their marked-to-market (MTM) losses on investments in government bonds (essentially) will offer them respite in the March 2018 quarter, when provisioning is expected to increase substantially.

Scrapping of the old restructuring schemes — CDR, SDR, S4A and 5/25 — is likely to lead to a notable rise in provisioning for many banks. Some banks will also be required to make additional provisioning for accounts under the Insolvency and Bankruptcy Code (IBC).

Banks had reported substantial MTM losses on their available-for-sale (AFS) portfolio in the December quarter, hurting profits.

The RBI’s breather, allowing them to stagger these losses over four quarters starting December 2017 quarter, would mean that banks have the option of writing back half of the MTM losses incurred in the December quarter in the March 2018 quarter.

While the banks also have the choice of staggering their MTM losses incurred in the March 2018 quarter over four quarters, the relief will not be very significant.

This is because the Centre’s recent move to lower the borrowing programme for the first half of 2018-19 has already cooled off yields on 10-year G-Secs, which have fallen by 30 basis points (bps) in the past week.

With the yields now almost flat from the December-end levels, MTM losses for the March quarter were in any case expected to be marginal.

Substantial relief

While private sector banks have remained net sellers in G-Secs through most of 2017-18, public sector banks (PSBs) have remained net buyers through most of the fiscal, despite yields on G-Secs shooting up over a percentage point since August 2017.

In the January-March quarter, however, PSBs turned net sellers, owing to muted growth in deposits and continued pick-up in credit offtake.

Until last week, when the Centre announced the cutback in its borrowing programme, G-Sec yields were ruling high. After going up by 70 bps in the December quarter, yield on 10-year G-Secs had gone up a further 30 bps in the March quarter.

This was expected to impact banks’ earnings in the March 2018 quarter, in two ways. With yields rising, banks may have suffered treasury losses (or at best no gains) from the sale of government bonds. PSBs sold ₹3.4 lakh crore of G-Secs in the January-March quarter (until 1 March 16), according to CCIL data. Two, MTM losses on banks’ AFS portfolio could hurt profits further. Banks have to mark-to-market investments held under AFS at frequent intervals.

The Centre’s move that led to G-Sec yields falling by 30 bps, had lowered the probability of banks reporting any meaningful MTM losses for the March quarter.

Writing back

But the steep MTM losses that some banks incurred in the December quarter, can now be written back (after the RBI’s move) to offer substantial relief to banks.

For instance, many PSBs had reported provisions on investment depreciation in the December quarter — SBI (₹4,044 crore), PNB (₹1,075 crore), Bank of India (₹906 crore) and Canara Bank (₹874 crore), to name a few. Some of these banks had also reported losses in the December quarter.

The RBI’s dispensation now allows these banks to write back half of these losses in the March quarter.

This will help cushion the impact of incremental provisioning on account of the RBI’s revised framework on resolving stressed accounts put out in February this year.

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