 "Caught between RBI-rupee crossfire, banks bleed")
Banks were not unduly worried even after the results for the quarter ending June 2013 showed rising bad loans amid slowing credit growth. Most banks reported high non-performing asset (NPA) numbers and saw erosion in their loan book and it was treasury operations that had saved the day, helping them to show growth in profit.
With RBI cutting the repo rate twice during January to March this year, banks thought the interest rate cycle is showing a downward trend – a calculation that prompted them to move papers in trading portfolio from held to maturity in April this year.
Banks are allowed to reshuffle their investment portfolio once a year, which they usually do at the beginning of the financial year when they shift securities from held to maturity to available for sale /held for trading and vice versa depending on the interest rate outlook.
But banks were obviously not prepared for a googly from the central bank. Interest rate took a U-turn in mid-July when the central bank started tightening liquidity to arrest the fall in rupee by curbing speculation.
As a result, the yield on the 10 year benchmark bond has shot up 146 bps since the beginning of the quarter. The consequence has been grim: provisioning requirements for the bond investment portfolio of banks, financial institutions and mutual funds are already Rs 1.2 lakh crore.
Analysts say a 100 bps rise in government bond yield will lead to roughly Rs 33,000 crore mark-to-market provision in one quarter – which is almost double of the first quarter profit of all banks put together (Rs 19,849 crore) or close to half the yearly profit of 2012-13 (Rs 77045 crore).
For State Bank of India, the country’s largest lender, the provisioning requirement for mark-to-market has already gone up to Rs 1500 crore, its chairman Pratip Chaudhuri said while announcing the bank's first quarter earnings last week.
“If bond yields do not come down from where they are, there will be MTM losses,” said HSU Kamath, chairman and managing director, Vijaya Bank.
Contrary to the initial expectation that the central bank’s measures are temporary, a realisation is gradually sinking in that RBI is not in a hurry to withdraw them. This is evident from the fact that banks have started increasing both lending and deposit rates.
Investors also reacted to the stress – evident from the BSE Bankex shedding 31% since its yearly high reached on May 17. The Sensex fell 10% during the same time.
Banks have now requested the central bank to allow them to shift their trading portfolio to held to maturity for one more time this year, but the central bank hasn’t given any indication of its thought process.
“We have called data from banks to understand the magnitude of the problem,” said B Mahapatra, executive director, RBI in a recent interaction with the media.
What is a double whammy for banks is an earlier directive of the central bank which reduced the ceiling on the proportion of securities that could be kept for held for maturity to 23%, from 25% of the net demand and time liabilities. Banks were given time to reduce it by 50bps in each quarter so that they can abide by the new ceiling in four quarters.
In a note to RBI, the Indian Banks' Association, while advocating for dispensation to banks on shifting securities from AFS to HTM, estimated the MTM loss to the tune of Rs 15,000 crore due to the cut in the ceiling.
"Banks were hoping that the loan loss due to impaired assets would be compensated by treasury gains. But that is not going to happen now," said a top public sector bank official.
Analysts say the NPA problem of banks will also worsen as the large corporate segment is overleveraged and is a potential source of additional asset quality stress for banks. A Credit Suisse report says while NPAs of Indian banks have already moved up from 2.5% to 4% of loans, most of these has been on account of rising delinquencies in agriculture, small and medium enterprises and mid-corporates.
Large corporate NPAs are still low; for example, 1.7% at SBI, where 5.6% of total loans are now non-performing.
According to a study of 10 large corporate groups by Credit Suisse, the debt levels of 10 large corporate groups, which account for 13% of the banking system’s loans (more than double the levels six years ago), are up another 15% in the past one year even as profitability continues to be under pressure.
The groups are (Adani, Essar, GMR, GVK, JSW, JP, Lanco, Anil Ambani’s Reliance Group, Vedanta and Videocon.
With RBI cutting the repo rate twice during January to March this year, banks thought the interest rate cycle is showing a downward trend – a calculation that prompted them to move papers in trading portfolio from held to maturity in April this year.
Banks are allowed to reshuffle their investment portfolio once a year, which they usually do at the beginning of the financial year when they shift securities from held to maturity to available for sale /held for trading and vice versa depending on the interest rate outlook.
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Typically, when interest rates are expected to soften, more securities are kept for sale/trading. It’s the opposite when interest rates are expected to go up. Banks need to make their investments mark-to-market for their trading portfolio.
But banks were obviously not prepared for a googly from the central bank. Interest rate took a U-turn in mid-July when the central bank started tightening liquidity to arrest the fall in rupee by curbing speculation.
As a result, the yield on the 10 year benchmark bond has shot up 146 bps since the beginning of the quarter. The consequence has been grim: provisioning requirements for the bond investment portfolio of banks, financial institutions and mutual funds are already Rs 1.2 lakh crore.
Analysts say a 100 bps rise in government bond yield will lead to roughly Rs 33,000 crore mark-to-market provision in one quarter – which is almost double of the first quarter profit of all banks put together (Rs 19,849 crore) or close to half the yearly profit of 2012-13 (Rs 77045 crore).
For State Bank of India, the country’s largest lender, the provisioning requirement for mark-to-market has already gone up to Rs 1500 crore, its chairman Pratip Chaudhuri said while announcing the bank's first quarter earnings last week.
“If bond yields do not come down from where they are, there will be MTM losses,” said HSU Kamath, chairman and managing director, Vijaya Bank.
Contrary to the initial expectation that the central bank’s measures are temporary, a realisation is gradually sinking in that RBI is not in a hurry to withdraw them. This is evident from the fact that banks have started increasing both lending and deposit rates.
Investors also reacted to the stress – evident from the BSE Bankex shedding 31% since its yearly high reached on May 17. The Sensex fell 10% during the same time.
Banks have now requested the central bank to allow them to shift their trading portfolio to held to maturity for one more time this year, but the central bank hasn’t given any indication of its thought process.
“We have called data from banks to understand the magnitude of the problem,” said B Mahapatra, executive director, RBI in a recent interaction with the media.
What is a double whammy for banks is an earlier directive of the central bank which reduced the ceiling on the proportion of securities that could be kept for held for maturity to 23%, from 25% of the net demand and time liabilities. Banks were given time to reduce it by 50bps in each quarter so that they can abide by the new ceiling in four quarters.
In a note to RBI, the Indian Banks' Association, while advocating for dispensation to banks on shifting securities from AFS to HTM, estimated the MTM loss to the tune of Rs 15,000 crore due to the cut in the ceiling.
"Banks were hoping that the loan loss due to impaired assets would be compensated by treasury gains. But that is not going to happen now," said a top public sector bank official.
Analysts say the NPA problem of banks will also worsen as the large corporate segment is overleveraged and is a potential source of additional asset quality stress for banks. A Credit Suisse report says while NPAs of Indian banks have already moved up from 2.5% to 4% of loans, most of these has been on account of rising delinquencies in agriculture, small and medium enterprises and mid-corporates.
Large corporate NPAs are still low; for example, 1.7% at SBI, where 5.6% of total loans are now non-performing.
According to a study of 10 large corporate groups by Credit Suisse, the debt levels of 10 large corporate groups, which account for 13% of the banking system’s loans (more than double the levels six years ago), are up another 15% in the past one year even as profitability continues to be under pressure.
The groups are (Adani, Essar, GMR, GVK, JSW, JP, Lanco, Anil Ambani’s Reliance Group, Vedanta and Videocon.