Banks reshuffle portfolios

CRR HIKE EFFECT

Some public sector banks have started rejigging their investment portfolios by transferring their statutory liquidity ratio (SLR) securities to the held-to-maturity (HTM) category.

This seems like a panic reaction to the 50 basis points hike in the cash reserve ratio (CRR) announced by the Reserve Bank of India (RBI) and the subsequent rise in bond yields.

According to dealers, public sector banks have put up the proposal for board clearance so that depending on market conditions, the transfer could be done.

According to a PSU bank dealer, banks are willing to debit the transfer losses to the profit and loss account but they want the board to give the permission as soon as possible.

The permission will afford dealers a free hand to do the transfer during opportune times. According to a money market player, an early approval will help as there are two more weeks to go for the quarter to get over.

Another dealer said banks will be transferring the entire 25 per cent SLR holdings to the HTM category so that for the rest of the fiscal they do not have to worry about interest rate fluctuations. "Transferring could be preferably done at the lowest price as there is an incentive to book profit during the beginning of next fiscal when the portfolios will be reshuffled again and some of these securities will be placed back in the SLR category," the dealer added.

The RBI has allowed banks to exceed the present limit of 25 per cent of total investments under the HTM category provided the excess comprises only SLR securities and the total SLR securities held in this category is not more than 25 per cent of their demand and time liabilities. The "one-time measure" will allow banks to shift their SLR securities to the HTM category any time during the current financial year.

Since banks do not need to mark to market the securities held under the HTM category, this segment of the investment portfolio will not take the hit in a rising interest rate scenario.

However, the regulator has made it clear that while transferring securities from the available for sale (AFS) and held for trading (HFT) categories to HTM, banks must provide for the depreciation "" the gap between the cost of acquisition of such securities and the market value on the date of transfer.

In other words, despite the relaxation, the banks cannot escape the one-time loss arising out of the fall in securities prices. They can, however, cut the losses or minimise the future loss by punting on the future course of interest rates.

A bank's investment portfolio has three types of bonds: HTM, AFS and held HFT. At the beginning of a year, a bank is required to decide on the bunch of securities to be kept under HTM.

This portfolio is not affected by the interest rate movement because the securities are not required to be valued according to the current market prices at the time of finalising the financial statement. In accounting parlance, this is called mark to market.

When the security prices fall - and interest rates rise - banks are required to make provisions to make good the fall in prices (the gap between the acquisition price and the market price) of securities kept under AFS and HFT segments.

This has a negative impact on the banks' bottomline as the profitability drops to the extent of provisioning requirements.