RBI allows banks to provide for MTM losses over 4 quarters

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New Delhi | Published: April 3, 2018 2:38:34 AM

Bankers had been requesting the RBI for such an exemption following the drastic rise in yields

rbi, banks, current fiscal, Investment Fluctuation ReserveRBI has advised banks to create an Investment Fluctuation Reserve (IFR) with effect from the current fiscal to protect against a possible rise in yields in the future.

The Reserve Bank of India (RBI) on Monday allowed banks the option to spread provisioning for mark to market (MTM) losses made in third and fourth quarters on investments held in the available-for-sale (AFS) and held-for-trading (HFT) category equally over four quarters keeping in view the systemic impact of the sharp rise in G-sec yields. “The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred,” the RBI stated.

Market participants say this is a big positive for the bond markets as this will likely enhance the participation by public sector banks (PSBs). PSBs had taken a huge MTM hit in the third and fourth quarters following which they had considerably reduced their buying activity.

Banks that will be utilising the option will have to make necessary disclosures which include details of the provisions for depreciation of the investment portfolio for the third and fourth quarters made during the quarter/year and the balance required to be made in the remaining quarters.

Bankers had been requesting the RBI for such an exemption following the drastic rise in yields. FE had earlier reported that the central bank had had talks with PSU banks to understand the MTM losses and that the RBI might allow banks to spread the provisions for the MTM losses over a few quarters rather than take the hit in a single quarter itself.

The RBI has also advised banks to create an Investment Fluctuation Reserve (IFR) with effect from the current fiscal to protect against a possible rise in yields in the future. An amount not less than the lower of the net profit on sale of investments during the year or the net profit for the year less mandatory appropriations should be transferred to the IFR, until it would be at least 2% of the HFT and AFS portfolio. Where feasible, it should be achieved in a period of three years.

Bankers have taken the news with a cheer. A PSU bank treasurer told FE that this will lead to considerable provision reversals from the third quarter.

“There was a significant amount that we provided for as MTM losses in Q3. Part of that might be reversed if the bank chooses to exercise the option. On the creation of the investment fluctuation reserve, my prelimnary analysis is that dividend payout from trading profits might not be possible from now on before the creation of the reserve. However, it is still a positive,” the banker said.

Ananth Narayan, Professor-Finance at SPJIMR, stated that the relief is a surprise climbdown by the RBI, and a welcome new fiscal year gift to banks.

“At least on a headline basis, Indian banks will be able to show better bottom line for FY18, even if they have to fully disclose the extent of forbearance. More importantly, this should help resolve the technical standoff in the bond market, and get PSBs active in the markets again. From a purist perspective, this accounting leeway does sound questionable. But from a practical perspective, this should give the system some time to build the infrastructure and tools that will remove the need for such forbearance,” Narayan said.

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