Banks face Rs 4500 cr erosion in gilt value

The banking sector is set to witness a market erosion of around Rs 4,500-4,800 crore in value of government securities held for trading for the quarter ended September 30.

The erosion will come up during the valuation of the trading portfolio of banks during the end of the second quarter.

The valuation is based on the market price of the government securities as on September 29. The yield on the ten-year benchmark government paper was 6.22 per cent on Wednesday, 40 basis points higher than the closing yield on June 30 (5.82 per cent).

However, the Fixed Income Money Market Derivatives Association (FIMMDA), dealers said, has released a provisional yield of 6.25 per cent for the 10-year benchmark.

The association will release its final figure after its meeting with members on Friday where it will be also deciding on the yields of the illiquid securities as well, said banking sources

Till recently, the banking sector has holding about Rs 5,00,000 crore worth of gilts under "available for sale" and "available for trading" categories. They need to mark to market these two portfolios.

Following the relaxation of investment norms by the RBI, banks have transferred chunk of securities to the "held to maturity" category which does not need to be marked to market.

By a round estimate, around Rs 3,00,000 crore worth of gilts are now held for trading and they need to be marked to market. According to dealers, with every one basis point rise in yields there is an erosion in the value to the extent of 4 paise.

Assuming that the Rs 3,00,000 crore gilts under trading portfolio has an average maturity of four years, the loss will be to the tune of around Rs 4,800 crore considering the yield has gone up by 40 basis points.

If the FIMMDA provisional figure is accepted, the erosion in market value of securities will run to a little over Rs 5,000 crore, said bankers.

This, however, does not mean that banks will have to provide for the losses. A treasury head mentioned that major PSU banks are sitting on pile of huge appreciation in portfolio which could be used for setting off the losses. Prices of government securities fell during the day by almost Re 1 and the 10-year yield touched 6.25 per cent.