Rising yields push banks to seek policy breather

KOLKATA: Banks have started knocking at the doors of the Reserve Bank of India for policy breather to avoid depreciation losses as bond yields shot up following regulatory measures to squeeze liquidity.

Lenders are now facing mark-to-market losses in their bond investments as yields rose sharply and price fell, raising the spectre of poor second quarterly earnings. In the first quarter, several banks rode on treasury gains to report profit growth despite rising bad loans, muted credit growth and falling margins.

The benchmark yield on 10-year government security rose to 9.16% on Monday, its highest level since November 2011. "The rise in bond yield is affecting banks in terms of both SLR and non-SLR portfolios. We have requested RBI for some relaxation in policy parameters," Union Bank of India chairman Debabrata Sarkar said in Kolkata. Investment in government securities is considered for maintaining statutory liquidity ratio, or SLR.

Sarkar said total depreciation losses taking all banks together could be around 40,000 crore. He said that Indian Banks' Association (IBA) is in dialogue with the banking regulator seeking one-time breather for switching bond holdings from available-for-sale (AFS) category to held-to-maturity (HTM) category. Banks are allowed to effect this transfer only once in a year.