Staring at huge losses from treasury operations, banks are planning to approach the Reserve Bank of India (RBI) for a special dispensation for the bonds being held in the available-for-sale (AFS) category as they have shed value in the backdrop of an off-cycle rate hike in May.

Banks have close to Rs 48.4 lakh crore invested in government bonds at the end of 3 June, according to the latest RBI data. About 25% of this is in the AFS category for which mark-to-market (MTM) losses have to be booked by the end of the quarter.

Banks are likely to request the RBI to amortise the MTM losses on bond holdings of the first quarter over the next three quarters of the financial year ending March 2023.

“Banks are in discussions on whether to put forth a representation to the RBI allowing them to amortise the losses over the next three quarters. We should also be given time beyond March up to September 2023 to restore the HTM to 21% from the current 23%,” said the treasury head of a bank.

The private and public sector banks are scheduled to have separate meetings with the Indian Banks’ Association (IBA), the apex body for banks in India. The IBA is then expected to put forward these concerns to the RBI.

All the bonds held in the AFS category have to be MTM at the end of the quarter. With yields moving up quite sharply and unexpectedly after the RBI hiked the repo rate by 40 basis points and CRR by 50 basis points in an unscheduled policy meet on 4 May, banks are set to incur losses on these bond holdings. On 8 June, the RBI further hiked the repo rate by 50 basis points.

The yield on the 91-day T-bill has risen from 3.4% before the rate hike to 5.15%, The six-month T-bill has shot up to 6.90% from 3.60% and the yield on the one-year bonds has gone up to 6.19% from 3.90%. The benchmark yields rose from 6.84% to 7.6%.

The MTM loss arises from the difference between the purchase price of a security and the market price on the last working day of a financial quarter.

With credit growth being poor in the last few years and there being ample liquidity in the system, banks have been increasing their government bond holdings. “This has come to rue the banks. Unless there is a forbearance because of the extraordinary happenings in the last few years including the outbreak of the coronavirus pandemic, the banking sector will be badly impacted,” said the treasury head of a private bank.

The public sector banks will have more of an issue with the SLR (statutory liquidity ratio) holdings of some being still at 27%, much above the regulatory requirement of 17.5%. Since the private sector banks already have a high credit-to-deposit ratio, their government bond holdings are lower. “But, yes, everyone will have an issue and banks are considering approaching the regulator through the IBA,” said a senior public sector bank official.

State Bank of India (SBI), for example, has Rs 11.62 lakh crore of SLR investment as of end-March 2022. “We are prepared to absorb the losses. But if the banking sector decides to approach the RBI, we will not be an outlier and will join with the other banks,” said a senior SBI official.

Some banks, however, think that the regulator may not allow a leeway as it had asked them to set up the investment fluctuation reserve (IFR), which was to be 2% of a bank’s net demand and time liabilities (NDTL). The IFR was to be used by the banks for such purposes. But while very few banks have set up the 2% reserve, many have a reserve fund of 1% of its NDTL, which is the gross credit and deposits of a bank. In the treasury book, banks have three options available - held to maturity (HTM), AFS and held for trading. The HTM limit was raised to 23% of the NDTL temporarily up to March 2023.

“In a year when the government borrowing programme is yet to be completed, it will be detrimental to have banks bleed by booking these notional losses as they are not actually selling them. MTM is more of a capital buffer. But to avoid disruptions, the regulator should allow banks to amortise their losses,” said another senior banker.