MUMBAI, April 13: The Reserve Bank of India (RBI) has reduced the yield-to-maturity (YTM) of all dated government securities (Gilts) except for one-year paper and gilts maturing in less than one year for valuation of bank portfolio of government and other securities while finalising their balance sheets for this year. Banks are expected to rake in good profits following the reduction in YTM.While the reduction in YTM is 141 basis points for 10-year government paper down from 13.56 per cent in March 1997 to 12.15 per cent in March 1998 it is as high as 186 basis points for five year paper (from 13.26 per cent to 11.40 per cent).The sharp cut in YTMs for securities of all maturities has come as a windfall for public sector banks - the major holders of gilts - as the industry will gain over Rs 5,000 crore from depreciation benefits. As per the RBI guidelines, banks are required to value the government securities in the ``current'' category as per market quotations as on the close of the financial yearwherever available and use the yields indicated by the central bank for valuation of bank portfolio where such quotations are not available.Explaining the YTM bonanza for banks, a banker said the depreciation amount, to be shown as reserves and surplus in the balance sheet, is eligible for inclusion in Tier II capital. This, in effect, means banks can write back the excess depreciation and use it to boost its net profit as well as capital adequacy ratio.The RBI has also directed banks to mark to market 70 per cent of their portfolio of approved securities in March 1999, up from 60 per cent in March 1998. A clutch of public sector banks, led by the State Bank of India, and Bank of Baroda has decided to mark to market the entire securities portfolio using the depreciation benefits on account of lower YTM.As per the RBI guidelines, banks are required to take the excess provision for depreciation in investments in 1996-97 over the requirement of the same in 1997-98 to the profit and loss account as acredit item and appropriate an equivalent amount to the capital reserve account. However, if there any ``appreciation in the value of securities on account of the method of valuation. it should not be booked as income," an RBI directive sent to all commercial banks said. Detailing the valuation method for permanent investments, the RBI said they should be valued at cost and in case the cost price is higher than the face value, the premium should be amortised over the remaining period of maturity of the security.The RBI has pegged the YTM for taxable public sector bonds at 100 basis points above gilts. For tax-free PSU bonds, the rate has been fixed at 10 per cent. The valuation of 6 per cent Capital Indexed Bonds should be done at cost, the RBI directive said.
