A loss of 250 billion rupees is during the third quarter is observed by banks, which has made them to approach RBI for a breathing space by way of spreading the losses over some quarters.
How has this loss happened? ICRA adds, that bank treasuries would be facing a loss of Rs. 155 billion in the third quarter due to sudden yield movement which is again considered to be quite conservative. Bond market experts have however, predicted that the loss could upto 250 billion rupees.
These banks had incidentally earned Rs. One trillion during fourth quarter of 2016-17 and second quarter of 2016-17. As yields raise the prices of bonds fall. Though it is difficult to gauge the estimate of loss, without a proper analysis, on an average banks hold the bonds for about four years. During this period, a rise of one basis point approximately leads to 6-7 paise loss per bond. Though experts estimate the loss to be as high as Rs. 300 billion the conservative estimate is Rs. 250 billion.
Since there is less cushion for absorption of interest rates changes, the increase in the bonds rates in the recent days, has resulted in MTM Losses on the Available For Sale (AFS) portion of the investments portfolio.
What is MTM loss?
- MTM or Market to Market is a method used to value bonds in a treasury portfolio
- Banks keep bonds in three baskets viz Held to maturity (MTM), Available for Sale (AFS) and Held for Trading (HFT)
- Atleast for two baskets MTM calucation is done.
- Banks value their bonds at the existing market price and not on the bonds acquired prices.
- Thus if a bond is acquired for Rs. 97 which has now fallen to Rs. 95, bank will record the loss of Rs. 2 in the trading account in order to show a fair value of bonds.
- MTM losses are categorized as nominal losses which is accounted only when banks sell bonds in the market and crystallise their losses.