"Softening of yields due to surplus liquidity could help the NPA-saddled banks register Rs 38,200 crore in potential treasury gains in the current financial year," said the report by India Ratings.
This is a "significantly large" number considering the entire banking sector had posted a Rs 23,600-crore profit in 2015-16, while state-run lenders, which control over two- thirds of the system reported a Rs 17,700-crore loss, it said.
The rating agency said the development comes at a time when the banking sector is facing challenging conditions and their profitability levels remain weak owing to continued pressure on asset quality and weak loan expansion.
It can be noted that the glut of liquidity following the demonetisation move, which has seen deposits of over Rs 12 trillion in the scrapped currency notes come into the system, positively impacted the yields.
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The rating outfit said only Rs 15,400 crore has been raised through the newly-introduced addition tier-I bonds and the softening yields can help increase mutual funds' interest in the instrument, and in turn help shore up the core capital levels.
The Ujwal Discom Assurance Yojana (Uday) bonds will also add to the treasury gains, it said, adding there is a difference between yields at the time of issuance and trading price of up to 1.50 per cent.
Uday is a Government scheme that seeks to restructure the debt of state power utilities
India Ratings said mid-sized state-run lenders, which incidentally are the most impacted ones by the asset quality troubles, will register larger treasury gains.
The agency said it also expects an increase in structural volatility in banks' liquidity coverage ratios, given the proposed switch from monthly to daily average LCR calculations from January 2018.
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