If banks were to mark-to-market all bond portfolios including those they have committed to hold on to till maturity, a chunk of the stellar profits they recorded last year would have been eroded.
In FY23, the profit after tax of banks was at ₹2.4 lakh crore, 38.4% higher than the previous year, data in the latest financial stability report (FSR) of the Reserve Bank of India show.
“As interest rates moved up in rapid succession over the past one year, both PSBs (public sector banks) and PVBs (private banks) recorded notional losses across G-secs (government security) and SDLs (state development loans) held in their HTM (held-to-maturity) books,” the RBI said in FSR.
“The notional loss in the HTM book of scheduled commercial banks (PSBs and PVBs) was ₹71,817 crore as at end March 2023 as compared with a notional profit of ₹418 crore as at end March 2022,” it said.
When interest rates are raised, yields on government bonds rise, leading to a decline in their prices.
In the last financial year, the RBI raised the repo rate by a total of 250 basis points to bring down inflation. Yield on the 10-year benchmark government bond rose by 48 basis points in FY23.
Even as the HTM portfolio provides banks with a buffer against actual bond losses, the turbulence in global bond markets earlier this year had concerned the finance ministry enough to ask for details on HTM holdings of state-owned banks in March. It was in that month that US lenders such as the Silicon Valley Bank had faced severe stress emanating from bond losses.
PROTECTIVE BUFFER
Amid the volatility in the bond market, the saving grace for banks was the use of the HTM portfolio. Indian banks are required to keep their bonds in three types of portfolios – HTM, AFS (available for sale) and HFT (held for trading).
“Unrealised losses of PSBs are largely in G-secs although the proportion of central and state government securities held by them in the HTM portfolio are by and large equal, but for PVBs the losses were distributed largely in line with their proportion of holdings,” the RBI said.
Bonds kept in the HTM portfolio are exempt from being marked-to-market – a practice that requires banks to recognise the impact of changes in bond prices on their books. Indian banks are mandatorily required to park a portion of their deposits in government bonds under the statutory liquidity ratio (SLR).
After the Covid-19 pandemic struck, the RBI permitted banks to park a larger amount of bonds in the HTM portfolio to help them smoothly manage interest rate risk amidst a huge increase in government borrowing. The central bank has, however, provided a phased timeline for the restoration of the HTM limits to earlier ones.
