Mumbai : The Reserve Bank of India’s guidelines for banks to create an investment fluctuation reserve are credit positive for Indian banks,Moody’s Investor Services said on Monday.
The global rating agency said investment fluctuation reserve will help protect banks from rise in bond yields and cushion the negative effect on their profitability. Last week, the RBI said, to ensure sufficient reserves to protect against rising yields in the future, all banks are advised to create an investment fluctuation reserve with effect from 2018-19 (Apr-Mar).
According to the RBI’s notification, the reserve shall comprise an amount not less than the lower of the following–net profit on sale of investments during the year or net profit for the year excluding mandatory appropriations, reports Cogencies. This amount shall be transferred to the reserve until the quantum of the same is at least 2% of the held-for-trade and available-for-sale portfolio on a continuing basis, and banks should achieve this within a period of three years.
Last week, the central bank also allowed banks the option to spread provisioning for marked-to-market losses suffered on government bond portfolios in Oct-Dec and Jan-Mar over a period of up to four quarters.
It was a relief for banks after the sharp rise in government bond yields in Oct-Mar.
Yield on the 10-year benchmark bond rose by a massive 67 basis points in Oct-Dec. Since its issuance in early January, yield on the current 10-year benchmark 7.17%, 2028 bond has jumped by 31 bps.
