MTM losses: No RBI breather for banks | The Financial Express

MTM losses: No RBI breather for banks

Central bank refuses to delink MTM losses from operating performance

MTM losses: No RBI breather for banks
Phased provisioning rejected earlier

The Reserve Bank of India (RBI) has rejected banks’ request for allowing flexibility in the accounting of mark-to-market (MTM) losses in their balance sheet, banking sources told FE. The request was aimed at delinking banks’ MTM losses from their operating performance.

This is for the second time since June that the central bank has turned down banks’ request for forbearance on accounting for treasury losses. An earlier proposal for allowing them to spread such losses, incurred during the June quarter, over the remaining quarters of this fiscal, was rejected. Banks suffered huge MTM losses due to a rise in interest rates this fiscal.

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Lenders, through the Indian Banks’ Association (IBA), had again approached the central bank to permit them to account for the MTM losses only after the operating profit is estimated. They had suggested that such losses be allowed to be a part of their “provisions and contingencies”, which come into the balance sheet calculations after the operating profit is arrived at, according to the sources.

Such a move, the bankers felt, would offer a more realistic picture of their performance, given the volatility in treasury operations.

However, RBI is understood to have rejected the demand on the ground that ensuring accounting transparency of banks is a non-negotiable part of its regulation. Any attempt by regulated entities at camouflaging the real picture on their operating performance wouldn’t be allowed, as it could mislead investors or other stakeholders.

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A banking expert said: “When banks made profits on their treasury operations, which contributed immensely to their operating profits, they never asked for this flexibility in accounting. But when they incur losses on this, they are asking for the change.”

A senior banker said this demand was in sync with banks’ earlier accounting practice, which was altered after RBI came out with new guidelines in August last year. At present, the MTM profit/loss of a bank is reflected in its “other income” category, which is a part of its operating performance.

Given its large size, SBI had witnessed MTM losses of as much as `6,549 crore in the June quarter. Rating agency Icra had estimated banks’ MTM losses at `10,000 crore-`13,000 crore for the June quarter.

Usually, when interest rates rise, bond prices fall and yields rise to align with the higher interest rates. This drop in bond prices triggers losses when banks value their bond portfolio at market prices. RBI has hiked the repo rate by 140 basis points since May 4 to 5.4% to tame elevated inflation, joining key central banks across the globe. The 10-year G-sec yield hit 7.28% on Monday, having risen substantially from 6.81% at the end of March. It had hit a peak of 7.62% in June. Since the central bank is widely expected to continue to raise the interest rates (some analysts expect it to rise by about 80-100 basis points more this fiscal), banks apprehend more losses on their bond portfolio.

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