PSBs seek relief from treasury loss provision in Q1FY23

Some public sector banks (PSBs), including State Bank of India (SBI), have approached the Reserve Bank of India (RBI) to request relief from provisions for losses on their treasury portfolios incurred during the current quarter. Banks have asked RBI to allow them to spread the required provisions for such losses over the four quarters of FY23, according to people in the know.

Lenders have been approaching RBI officials one-on-one in recent days. “We have spoken to the concerned chief general manager (CGM) and we understand that some other state-owned banks have made similar requests. If the regulator accedes to our request, a report can be expected in the coming days,” says a CEO with a large PSB.

In their discussions with the RBI, the banks cited the circular of 2 April 2018 from the central bank as a precedent. The 2018 circular had given banks the option to spread provisions for mark-to-market (MTM) losses on investments held in their available-for-sale (AFS) and held-for-trading (HFT) portfolios for the two quarters ended December 31, 2017, and March 31, 2018. The provision for each of the two quarters can be split equally over up to four quarters, the RBI had said.

Banks are required to write down their bond portfolios on a quarterly basis to account for declines in the valuation of their positions. In case of MTM losses, they have to make provisions for these losses, which hurts their profitability. The 90 basis points (bps) increase in the repo rate in May and June, along with other measures aimed at extracting systemic liquidity, led to a sharp rise in interest rates in the current quarter. Between March 31 and June 28, the benchmark 10-year government bond yield rose 63 bps to 7.466%.

Anil Gupta, vice president & co-group head – financial industry ratings, Icra, said that with bond yields rising, banks are more likely to have treasury losses on their books. “The magnitude of the losses will depend on the yield to maturity and maturity of each bank’s AFS portfolio at the start of the quarter,” Gupta said.

In a report released shortly after the RBI’s May 4 out-of-turn repo rate hike, analysts at Motilal Oswal Financial Services (MOFSL) said the hardening of interest rates could cause banks to report MTM losses. about Q1FY23. “Previously, some PSU banks indicated that their Treasury portfolios are protected up to a 10-year yield of 6.8-6.9%, which is where the bonds traded at the end of Q4FY22,” MOFSL said.

An improvement in operating income, helped by mitigating slippages and improving credit growth and margins, could somewhat cushion these Treasury losses, the report said.

At the same time, some banks said they had already braced themselves for a likely hike in interest rates and would not need provisional waivers. “We saw the interest rate hike coming and have taken positions accordingly. So we don’t expect any major losses,” said a senior executive at a medium-sized private bank.

In the past, exemption from MTM losses has been a contentious issue between the RBI and PSBs. In a January 2018 speech, then-RBI Deputy Governor Viral Acharya had spoken out against using regulatory waivers to help banks manage their interest rate risk. “…the trend of regular use of ex post regulatory dispensation to reduce banks’ interest rate risk is not desirable from the point of view of efficient price discovery on the g-sec market and effective market discipline on the g-sec issuer. It also doesn’t bode well for developing a healthy risk management culture in banks,” Acharya had said.

PSBs had become net sellers in the government bond market after Acharya’s speech, sparking fears of rising government borrowing costs. Their participation in the market only improved after the publication of the circular dated April 2, 2018.

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