Banks rally post RBI move asking lenders to spread bond losses over 4 quarters

Banking stocks on Tuesday witnessed a rally on the back of the central bank’s announcement on bond losses.

The Nifty Bank index was up almost half a percent, led by gains in Bank of Baroda, PNB, SBI, Yes Bank and ICICI Bank, among others. They gained 1-4 percent in the morning trade.

Meanwhile, PSU banks saw a bigger rally, with the index trading 3 percent higher. Gains were visible in names such as Union Bank, Bank of India, Bank of Baroda, Syndicate Bank, OBC, and Canara Bank as well. All stocks in the index rose 1-4 percent.

With a view to help banks spread losses incurred on bond yield movements, Reserve Bank of India has allowed banks to spread the provisioning they need to make for these losses over a maximum of four quarters.

Banks will also have to create an Investment Fluctuation Reserve (IFR) to protect against an uptick in yields in the future. The IFR shall be eligible for inclusion in tier-2 capital.

In a statement on its website on Monday, RBI said: “With a view to addressing the systemic impact of sharp increase in the yields on Government Securities, it has been decided to grant banks the option to spread provisioning for mark to market (MTM) losses on investments held in AFS and HFT 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.”