THE government may require to frontload capital in state-run lenders owing to mark-to-market losses to be incurred by them after bond yields rose, the local unit of Moody's Investors Service said.
Icra, the Indian unit of Moody’s, estimates that the banking sector may have to suffer losses of around Rs 15,500 crore in the third-quarter as bond yields have risen sharply after the government announced additional borrowing.
The benchmark 10-year bond yield has climbed by 67 bps during third-quarter of the fiscal year on concern over the government missing its fiscal deficit target for the year and also in the next year, ahead of the general elections.
"While the recent capital mobilisation by a few PSBs through the QIP route during December 2017 would help them limit capital erosion, losses on the investment portfolio may necessitate higher quantum of capital frontloading into PSBs by the GoI during FY18," said Karthik Srinivasan, group head, financial sector ratings, Icra.
"As on September 30, 2017, public sector banks (PSBs) had a larger share of available for sale (AFS) book in their total investment portfolio with longer duration in relation to private sector banks. Accordingly, PSBs are likely to account for 80 per cent share of overall MTM losses, as per our estimates.”
With losses before tax of Rs 5,624 crore during H1FY18, MTM losses will further add to losses and erode capital ratios for
PSBs, Icra said.
In contrast, private banks are relatively better placed to absorb the MTM losses with profit before tax of Rs 30,994 crore during first-half of fiscal 2018.
"With unexpected surge in yields on consequent increase in losses, the GoI may need to increase the capital it intends to frontload into the PSBs by recapitalisation bonds," Srinivasan said.
Meanwhile, India's benchmark 10-year bond yield posted its first annual gain in four years in 2017, offsetting a 25 basis point repo rate cut, as investors were weighed by Reserve Bank of India’s cautious stance on inflation and as the government announced additional borrowing in anticipation of missing the fiscal deficit target. The benchmark 10-year bond yield rose 85 basis points in 2017 after falling for 125 bps the previous year which saw rate cut of 50 basis points by the RBI amid surplus liquidity condition.
The government has announced additional market borrowing amounting to Rs 50,000 crore via dated securities and Rs 23,006 crore via the net T-bill route. The amount is much higher than market expectations of Rs 25,000-30,000 crore additional borrowing via dated securities.
The total market borrowing has now increased by Rs 73,000 crore from the FY 2018 budgeted estimates. Therefore in the last quarter this fiscal year, the gross issuance of government securities will be Rs 93,000 crore as against Rs 43,000 crore budgeted earlier and the gross T-bill issuances will amount to Rs 1.79 lakh crore.
"In contrast to equities and the currency, India’s bond markets have sold off in 2017. Looking ahead, there are several reasons to think that bond yields will continue to rise in 2018," said Shilan Shah, senior India economist at Capital Economics. He expects the 10-year bond yield to rise to 7.50 per cent by end of 2018. "We expect the RBI to begin tightening monetary policy over the coming year as inflationary pressure builds." Going ahead, Indian government bond yields are set to harden in 2018 as investors expect the RBI to start reversing its easing cycle during the year amid risks that the retail inflation will likely breach the comfort zone of central bank, and on digression from the desired fiscal path, treasury officials said.