MUMBAI: Losses from the treasury business due to the recent sharp declines in bond prices could prolong the agony for Indian banks that are already groaning under the weight of mounting provisions for non performing assets (NPAs).

In the third quarter ended December 2017, traditionally the busy season in India, yields on the benchmark 10-year government bond surged 67 basis points, taking prices lower. The fall in bond prices was largely due to a likelihood of a slippage in the government's fiscal deficit target, meaning that lenders will have to provide for the mark-to-market (MTM) losses on their investment portfolios during the quarter.

Rating agency Icra estimates that the MTM loss for the entire banking sector will be around Rs 15,500 crore during the quarter, 80 per cent of which is to be borne by public sector banks. Such losses will erode capital ratios for the lenders.

Treasury profits were the saving grace for lenders in the last couple of years as they grappled with rising NPA provisions. In the past six quarters (Q4FY2016-Q2FY2018), banks made treasury gains of around Rs 1 lakh crore, much higher than the total profit before tax (PBT) of Rs 51,105 crore for the entire banking sector during this period, Icra stated in a note last week.

"The losses due to treasury will be the real villain in the piece this quarter," said Sanjiv Bhasin, executive vice president, markets, at IIFL. "Although NPA pressures remain, we are seeing some recovery in sectors like steel, power and infrastructure. Credit growth is also picking up as seen with the rising commercial vehicle sales, which will benefit banks like IndusInd," Bhasin said.

South Indian Bank kicks off the banking results on January 9, followed by IndusInd on January 11. Public sector banks are likely to release their earnings toward end-January or early February.

Analysts said that though the pace of NPA accumulation has come down, banks will still have to make extra provisions, with the central bank rules stipulating that lenders must set aside 50per cent of the loan amount for cases referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code (IBC). Provisions should be 100per cent in cases that fail to get resolved under IBC and are forced into liquidation.

"Besides provisions, there are also write offs that banks may have to take for cases in which they have had to take a haircut. I would expect the next two quarters to be tough for banks because high provisions on both treasury losses and IBC losses will hit them hard," said Asutosh Mishra, analyst at Reliance Securities.