MUMBAI: In a significant move, the Reserve Bank of India (RBI) on Monday allowed banks to spread bond trading losses over four quarters. These trading losses should have incurred between December 2017 and March 2018, and the amount will be spread equally up to four quarters. As per estimates, state-run banks could lose over Rs 20,000 crore for the quarter ending March 2018, on account of higher bond yields. The move will benefit all 21 public sector banks, which took a massive hit due to a spike in bond yields in the recent months.
In a circular issued on Monday, RBI said bonds can spread out the mark-to-market hit taken on their bond portfolios to address “the systemic impact of sharp rise in the yields on government securities”. RBI said the banks can stagger provisioning starting the quarter in which the loss occurred, but should make suitable disclosures in their notes to accounts regarding balance provisioning pending. Besides, the regulator also advised banks to set up an Investment Fluctuation Reserve from this fiscal.
This should be at least 2 per cent of the held-for-maturity and available-for-sale portfolio and must not be less than net profit on sale of investments during the year and net profit for the year excluding appropriations. The proposed reserve should be built up within three years and will be eligible to be part of the bank’s tier-2 capital. The bank will be allowed to draw down should the reserves exceed 2 per cent. In case if it’s below 2 per cent, it can be drawn down to meet tier-1 capital requirements.