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MOSL: FINANCIALS – BANKS-RBI allows spreading of MTM losses, mandates creation of IFR-Some relief for PSBs

Financials - Banks: RBI allows spreading of MTM losses, mandates creation of IFR; Some relief for PSBs

 

• In view of the sharp increase in G-Sec yields since 3QFY18 and the corresponding MTM provision impact on banks, the Reserve Bank of India (RBI) has allowed banks to spread their MTM provisions over a maximum of four quarters, beginning the quarter in which the loss was incurred. The 10-year G-Sec yields rose by 67bp in the December 2017 quarter - the steepest quarterly increase in the last four years - leading to significant MTM losses for PSU banks, which have a higher proportion of AFS/HFT investments on their books compared to private banks (refer Exhibit 3).
• The banks utilizing the option are required to make requisite disclosures (including the balance provisions to be made) in their notes to accounts.
• The RBI has further guided banks to create an Investment Fluctuation Reserve (IFR) starting FY19, amounting to at least 2% of their total AFS and HFT portfolio, within three years, i.e., by the end of FY21. The IFR will be eligible for inclusion in tier-2 capital.
• Banks will be allowed to withdraw any amount in excess of the mandated 2% from their IFR for credit to the P&L account, but will be required to make disclosures for the same in the notes to accounts. Drawdown from IFR where the balance is less than 2% of AFS/HFT portfolio is allowed, subject to the following conditions:
• The drawn down amount is used only for meeting the minimum CET1/Tier1 capital requirements.
• There is no surplus in the P&L carried forward into the next year.
• The amount drawn down is not more than the difference between MTM losses made during the year and the net profit on sale of investments during the year.