‘Q1: Rising yields may deal Rs 13K-crore MTM loss to banks’

India’s 10-year benchmark bond yield had risen by 60 basis points to 7.45 per cent during the quarter ended June 2022, leading to a fall in their prices. The rise in bond yields came after the RBI hiked the Repo rates by 90 basis points since May this year amid the global surge in inflation and hike in interest rates by the US Federal Reserves. Bond yields in the US and other countries have also shot up.

Mark-to-market loss — which is an accounting entry — can occur when government securities held by banks are valued at the current market value. If a security was purchased at a certain price and the market price later fell, the holder would have an unrealised loss, and marking the security down to the new market price would result in MTM loss.

Anil Gupta, vice president, Icra, said: “Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12 per cent in their core operating profits in FY2023, which will more than offset the MTM losses. However, if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY2023.”

The headline asset quality numbers continue to improve for banks with gross non-performing advances (GNPAs) of 6 per cent (lowest in last six years — since December 31, 2015) and net NPAs of 1.7 per cent (lowest in last nine years, i.e. March 31, 2013). “With a lower slippage rate and better credit growth, we expect the GNPAs to decline further to 5.2-5.3 per cent by March 31, 2023. The net NPAs may, however, remain range-bound at 1.6-1.8 per cent as the recoveries and upgrades could moderate in the current year in the absence of restructuring,” it said.

With rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1 of FY23. To meet the funding requirements, large borrowers have shifted from debt capital market to banks, which also is aiding the improvement in the credit offtake. While rising interest rates may moderate credit demand in the coming quarters, the rating agency has estimated the incremental bank credit offtake at Rs 12-13 trillion (10.1-11.0 per cent rise year-on-year), well above the incremental bank credit offtake of Rs 10.5 trillion in FY22.