Commercial banks are expected to incur a loss of around Rs 1,500 crore on their incremental investments due to the rise in interest rates, which will wipe out the projected windfall from investment portfolio valuation.
This is, however, seen to be marginally offset by the rise in lending rates which will increase the income of banks immediately. But the rise in deposit rates will be only on maturity.
The debt markets update of ICICI Securities and Finance (I-Sec) said though the Reserve Bank of India (RBI) seems to have achieved success in stabilising the rupee between 38.50 and 39, banks stand to lose substantially on account of the depreciation of their gilts portfolio.
Assuming that the yield curve indicated by reserves on March 31 is such that the 10-year paper is marked at 13 per cent and the one-year security at 10.5 per cent, banks would need to provide for depreciation for the increase in their SLR holding during the current financial year, says I-Sec.
I-Sec said that the weighted average coupon of government security issuances in the current year is 11.35 per cent at a composite price value of a basis point (PVBP) of 3.70 paise and a modified duration of 3.88 years.
Hence, assuming that the March 31 valuation curve from 10.5 per cent for one-year and 13 per cent for 10-year, the yield on a security having a modified duration of 3.88 years would be 12.75 per cent.
This implies a rise in yields on banks incremental securities portfolio by roughly 140 basis points.
The net increase this year till date in the banks holding of government securities has been Rs 26,000 crore. On this basis I sec has worked out the loss on portfolio at Rs 1,347 crore. According to I-SEC, additionally, banks have made incremental investments of Rs 4,000 crore in public sector unit bonds at an average yield of 13.25 per cent for five years giving an average PVBP of 3.2 paise. .
These instruments would be marked atleast 125 basis points above the acquisition yield, implying a loss of Rs 160 crore on this portfolio, Thus banks which at one stage seemed to be in a position to book windfall profits from portfolio valuation will incur an estimated loss of Rs 1,507 crore on their incremental acquisitions due to the recent surge in interest rates across the maturity and credit spectrums, I-Sec states.
Meanwhile, according to Aashish Pitale, debt research manager at I-Sec, going by current yields, banks will take a big hit on their balance sheets.
Even assuming a best-case scenario of yields recovering to March 31, 1997 levels I estimate that banks provisions towards depreciation on their bond investments will be at least Rs 1,500 crore on acquisitions made during this year, he said.
