Banks get breather from Reserve Bank on provisioning for bond losses

The Reserve Bank of India (RBI) has decided to ease the provisioning norms for bond losses in quarter three and quarter four of 2017-18.

Accordingly, it has allowed banks to spread bond losses in these two quarters over four quarters.

``It has been decided to allow banks the option to spread provisioning for mark-to-market (MTM) losses on investments held in AFS (available for sale) and HFT (held for trading) for the quarters ended December 31, 2017 and March 31, 2018. The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred,’’ the RBI said.

The easing of the provisioning norm is done to address the systemic impact of sharp increase in the yields on Government securities.

According to a master circular dated July 1, 2015, banks are required to mark-to-market (MTM) the individual scrips in available for sale (AFS) at quarterly/more frequent intervals and held-for-trading (HFT) at monthly/more frequent intervals and provide for net depreciation, if any.

The RBI, however, has set certain terms while easing the provisioning for these two quarters.

Banks that utilise the option are told to make suitable disclosures in their notes to accounts/quarterly results providing details of the provisions for depreciation of the investment portfolio for the quarters ended December 2017 and March 2018 made during the quarter/year and the balance required to be made in the remaining quarters.

Further, with a view to building up of adequate reserves to protect against increase in yields in future, all banks are advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19.

An amount not less than the lower of the net profit on sale of investments during the year and net profit for the year less mandatory appropriations shall be transferred to the IFR, until the amount of IFR is at least 2 per cent of the HFT and AFS portfolio, on a continuing basis.

``Where feasible, this should be achieved within a period of 3 years,’’ the RBI said.

``A bank may, at its discretion, draw down the balance available in IFR in excess of 2 per cent of its HFT and AFS portfolio, for credit to the balance of profit/loss as disclosed in the profit and loss account at the end of any accounting year,’’ the RBI said. In the event the balance in the IFR was less than 2 per cent of the HFT and AFS investment portfolio, a draw down would be permitted subject to certain specified conditions, the RBI said.