In a relief to the lenders hit by treasury losses and bad loans, the Reserve Bank of India (RBI) on Monday allowed banks to spread provisions for bond losses in third and fourth quarters of the financial year 2017-18 over the next four quarters. The RBI also advised banks to create an investment fluctuation reserve (IFR) as a safety net to tackle any rise in bond yields.
The central bank said the provisioning for each of these quarters might be spread equally in up to four quarters, commencing with the quarter in which the loss was incurred. “With a view to addressing the systemic impact of sharp increase in the yields on government securities, it has been decided to grant banks the option to spread provisioning for mark-to-market (MTM) losses on investments held in the available-for-sale (AFS) and in the held-for-trading (HFT) for the quarters ended December 2017 and March 2018,” RBI said in a notification.
Bankers said bad loans and the spike in bond yields have been eating into their profits. When bond yields rise, prices fall and the bank makes losses in its investment portfolio. Crisil expects gross non-performing assets (NPAs) to shoot up to up to 11 per cent in the March quarter from 9.4 per cent a year ago, and rise further to hit a peak of 11.5 per cent during the financial year but will slip to 10.3 per cent in March 2019.
Rating agencies had pegged investment losses at over Rs 15,000 crore in the December quarter alone while the whole year is yet to be ascertained. In FY17, banks had made huge gains to the tune of over Rs 1 lakh crore.
The RBI asked banks that utilise the new option to make suitable disclosures in their notes to accounts/ quarterly results providing details of the provisions for depreciation of the investment portfolio for the quarters ended December 2017 and March 2018 made during the quarter/ year and the balance required to be made in the remaining quarters.
Further, with a view to building up of adequate reserves to protect against increase in yields in future, it advised all banks to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19. It should be an amount not less than the lower of the net profit on sale of investments during the year. The net profit for the year less mandatory appropriations should be transferred to the IFR, until the amount of IFR is at least 2 per cent of the HFT and AFS portfolio, on a continuing basis. “Where feasible, this should be achieved within three years,” the notification said.
A bank may, at its discretion, draw down the balance available in the IFR in excess of 2 per cent of its HFT and AFS portfolios, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year. If the amount in IFR is less than 2 per cent of the HFT and AFS investment portfolios,a drawdown will be permitted if the amount is used only for meeting the minimum CET1/Tier-1 capital requirements and the drawdown is not more than the extent of the MTM provisions made during the aforesaid year and does not exceed the net profit on sale of investments during that year.