The yield on benchmark India 10-year bonds on Wednesday fell slightly by 0.17 percentage point to 7.48% when the markets opened after a one-day break due to a public holiday on Tuesday. While bond yields have fluctuated in the last six days, albeit staying below 7.612% mark touched on the announcement of fiscal deficit in Budget 2018.
India’s government bonds have recorded worst performance in the Asian market, which India Ratings and Research has said will be taking a toll on the banking sector. Ind-Ra has estimated that profitability of India’s banks would be affected by Rs 305 billion and the return on assets would be of around 30 basis points in the fiscal year 2017-18.
“The large losses emanating out of the quick rise in bond yields especially in the last six weeks will result in large mark-to-market losses on lenders’ non-held-to-maturity investment holdings,” the rating agency said adding that there will be considerable fall in the treasury income of the banks in the fourth quarter of current fiscal, along with some spill-over in the next fiscal year.
Due to higher bond yields, the worst hit would be mid-sized banks. The treasury loss will also affect the “vigour” gained after the announcement of the bank recapitalisation, Ind-Ra said.
The bond yields after falling between January 2015 and June 2017, have been hardening since July 2017. The bond yields have touched 7.6% in mid-January from 7.5% in July last year — up by 110 basis points in just six months.
“The banking systems’ investments increased significantly in FY17 and FY18 as banks constrained by capitalisation and low credit offtake parked their deposit accretion in low-risk weight government securities. As the yields were falling, some of the banks used realised gains to offset the profitability pressure on the core business. As the interest rate curve shifts, many of the banks, especially mid-sized banks could face large provisioning requirements,” Ind-Ra said in a report.
Singapore-based DBS group has said that after RBI’s status quo, the bond yields in short-term are likely to consolidate but so is not the case in long-term. The DBS group said that domestic factors and higher global yields will push the benchmark 10-year bonds up at a gradual pace in the long-term. Meanwhile, SBI chief Rajnish Kumar also blamed treasury losses as one of the factors leading to a shocking loss in 19 years in the third quarter.
The Reserve Bank of India, on Monday, ordered a revamp of stressed asset resolution, which analysts believe will, too, put pressure on banks’ earnings in future due to higher provisioning.