Mark-to-market provisions: Banks may knock on RBI's doors again
August 10, 2022
The country's largest lender State Bank of India on Saturday (SBI) reported a 6.7% drop in standalone profit after tax to ₹6,068 crore for the June quarter after it booked ₹6,549 crore MTM losses on its investment book. Its operating profit dropped to ₹12,753 crore in the April-June period from ₹18,975 crore in the year earlier, dented by MTM losses.
Banks will again ask the Reserve Bank of India (RBI) to allow them to spread provisions toward mark-to-market (MTM) losses over several quarters following a sharp hit in the June quarter on this account. The RBI had turned down a similar demand by banks in June after anticipated significant losses in the first quarter, said bank executives aware of the matter.
Alternatively, banks will ask that provisions for such losses be housed under provisions and contingencies after operating profits are estimated, which will ensure that operating profits are not hit due to these notional losses. This would also give a fairer estimate of operating performance, according to the banks.
"This will help in avoiding fluctuations in the operating profits," said one of the persons.
The country's largest lender State Bank of India NSE -2.01 % on Saturday (SBI NSE -2.01 %) reported a 6.7% drop in standalone profit after tax to ₹6,068 crore for the June quarter after it booked ₹6,549 crore MTM losses on its investment book. Its operating profit dropped to ₹12,753 crore in the April-June period from ₹18,975 crore in the year earlier, dented by MTM losses.
RBI Offered Relaxation in 2017
In the past, the RBI had allowed banks to stagger MTM losses over four quarters starting December 2017.
"We will reach out to the RBI one more time," said the executive cited above. "Already, some banks have raised this issue in the recent meeting of lenders through the Indian Banks' Association."
Bond yields and prices are inversely related--when market interest rates rise, bond prices fall to align yields with the higher rates. This decline causes losses when banks value their bond portfolio at market price.
Punjab National Bank NSE -0.60 % posted a Rs 1,409 crore MTM loss in the June quarter. Rating agency ICRA NSE 0.37 % expects total banking sector MTM losses of Rs 10,000-13,000 crore in the first quarter of FY23.
Since May 4, the RBI has raised the repo rate by a cumulative 1.4 percentage points to 5.4% in three instalments. The yield on benchmark 10-year paper has hardened from 6.9% at the start of the current fiscal year to about 7.35% now, hitting a high of 7.62% in mid-June, in response to monetary tightening.
The general consensus is that the RBI is likely to raise the repo rate by up to a percentage point more, which would inflict further MTM losses on banks. If yields don't harden, banks will gain as they will be able to write back some of the MTM losses.
"We have done some kind of sensitivity analysis. If we go by the government securities yield of 7.3%, which was yesterday's closing, we can write back Rs1,900 crore of MTM provision, which we have already created," SBI chairman Dinesh Khara said while announcing June quarter results.
[The Economic Times]