RBI takes stock of rising yield impact on banks

The Reserve Bank of India took stock of the impact of the rising bond yield on commercial banks' balance sheets at a meeting of select public sector banks and the Indian Banks' Association (IBA).

The central bank also reviewed the overall macro-economic situation and assured bankers that the impact of the rising oil price could be absorbed by the economy.

According to banking sources, the RBI was concerned about the impact of the current market conditions on weak banks. The IBA has suggested a number of ways to the RBI to enable banks to minimise the impact of rising yields on their balance sheets.

Among the measures suggested was hiking the proportion of government securities held in the category of held to maturity (HTM) which is not exposed to market risk.

In other words, they want more gilts to be transferred from the active category meant for sale and trading to category where gilts are held till maturity to ward off the market risk. A rough estimate puts the notional losses of banks at over Rs 50,000 crore.

Bankers also suggested that for the September quarter, they should be allowed to use the reserves maintained as investment fluctuation reserve (IFR) before arriving at the profit and loss figure.

This is because as per the current norms, the provisioning towards interest rate risk from the IFR could be done as an off-balance sheet measure after arriving at the profit and loss figure. Senior bankers said the very purpose to avoid a loss will not be met if IFR is used as off-balance sheet provisioning.

The bankers also suggested that a purchase window could be opened by the Reserve Bank of India to buy back government securities from market players during the period of high interest rate volatility to avoid sharp fall in gilt prices as was seen in the last few weeks.

The Fixed Income Money Market Derivatives' Association (FIMMDA) has also represented a comprehensive paper to the RBI citing the impact of the current market situation to on the banks' balance sheet.

Banking sources said this could be a temporary measure as the inflation will moderate during the end of the year and interest rates will also not get affected .

Since the beginning of the current fiscal, the 10-year bonds went up by 150 basis points at mid-August. It is now hovering at around 6.25 per cent due to volatility rising from higher inflation.