The falling yields due to the liquidity flush post-demonetisation is likely to deliver a Rs 38,200-crore bonanza to the bleeding banks through treasury gains, a report today said.
"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.
The gains can help the capital-starved banks buffer up their capital levels, while the well-capitalised ones should focus on upping their provision coverage ratios, which have shown a declining trend recently, it said.
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.
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.
A surge in deposits, due to currency recall exercise, will increase demand for Government and high-rated corporate bonds, and is likely to put downward pressure on yields under the current tepid credit demand scenario, it said.
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.
"Some mid-sized public sector banks witnessed an increase in their investment portfolios in recent quarters on account of challenges with regard to the deployment of incremental deposits. The yield compression has proved to be a boon for them."
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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