Mumbai: The Reserve Bank of India (RBI) on Monday allowed banks to spread out the provisioning to cover losses on their government bond portfolio across four quarters, in a relief for lenders who would have otherwise faced an immediate hit to their bond portfolio due to rising yields.

This dispensation to spread the so-called mark-to-market (MTM) provisioning is available for the quarters ending December 2017 and March 2018.

Banks using such an option will have to make the disclosure in their notes to accounts of the quarterly results, the RBI said. The disclosure should contain details such as how much provisioning is done and the balance that is required to be done.

“The latest dispensation given to banks, which they were trying to seek, will bring back banks to participate in the bond market," said Jayesh Mehta, head of treasury for India at Bank of America Merrill Lynch.

Banks had sought such a dispensation in January. However, this was then criticized by RBI deputy governor Viral Acharya. Addressing dealers on 15 January, Acharya criticized banks for seeking regulatory dispensation in managing interest rate risks and had said that granting such leeway was not desirable from the point of view of efficient price discovery in the market.

Banks have to revalue their bond portfolio at the end of every quarter. In case the value of the securities is lower than the market rate, they are mandated to keep aside funds as MTM provisioning. The bond portfolio is divided into three categories, namely—available for sale (AFS), held for trading (HFT), and held to maturity (HTM).

HTM is the only category where quarterly MTM provisioning is not applicable.

In the December quarter, the yield on 10-year benchmark government security rose by around 66 basis points, mainly because of worries that the government may not meet its fiscal deficit target, which eventually turned out to be true. This forced banks to raise MTM provisions and kept profitability under pressure. For instance, State Bank of India had provided Rs3,400 crore for MTM losses in fiscal third quarter.

Yields remained elevated in the March quarter because of fiscal worries and volatile external factors. However, the surprise lower-than-expected government borrowing for the first half of 2019 helped yields fall and wipe out the potential of higher MTM losses. In the March quarter, the yield on the benchmark paper rose only 7 basis points.

Last week, the government said it will raise Rs2.88 trillion by selling bonds in the six months to 30 September, about 48% of its budgeted bond sales in the first half, lower than the 60-65% in previous years. This is the lowest first-half borrowing in the last 10 years in percentage terms.

Separately, the RBI has also directed banks to create an investment fluctuation reserve to build up an ammunition against rising yields.

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