MUMBAI: Banks are staring at mark to market losses on their bond holdings beyond the stipulated 21 percent of their deposits. To calm the nerves of banks which have been funding government’s record borrowings, the RBI may have to intervene more aggressively or make provisions for exemption the losses to enable continued support to government borrowing.
The average increase in G-sec yields across three,five and & 10 years’ maturity is around 31 basis points since the budget, according to a report by SBI’s economics research team. ” This is important as any further upward movement in G-sec yields even by 10 bps from the current levels could usher in MTM losses for banks” said S K Ghosh, group chief economic advisor at SBI.” That could be a minor blip of a rather wise exceptional year in FY21 for bond markets with the RBI assiduously supporting debt management of Government at lowest possible cost in 16 years”
Banks have to mark to market(MTM) the value of their securities in excess of what is statutorily required. At the system level, excess government bonding over and above the statutory liquidity ratio of 18 per cent, after factoring in the pandemic related relaxations is reckoned to be around 8 per cent of the banks’ bond portfolio. This could translate into a loss of Rs 500 crore at the system level according to market estimates. “Though the large banks are adequately capitalised, but rising MTM pressure will keep the bank’s away from bond market” said Soumyajit Niyogi, associate director at India Ratings and Research. “And this is at a time when huge SLR borrowings to start from April, and demand for credit is likely to recover”
Experts suggest that the way out to rein in rising yield is more aggressive intervention by the central banks. ” RBI could conduct large scale open market operations to provide necessary steam to bond market to rally and with increase in price, many short sold position will trigger stop losses and market players will scramble to cover open positions” said Ghosh. “This will hasten a rapid fall in yields over a short period of time”
Besides, speaking to the market players , central bank could conduct OMO in illiquid securities, impose margin requirements, allow more players and penalise short sellers among others, according to SBI’s research report. These measures are essential as surge in yields could result in mark to market losses for eligible securities for banks, the report noted.