The Hindu Business Line : Banks juggle G-secs to improve bottomline

Banking sources said here that only portions of these securities were being moved into the HTM category. The reason for this is that valuation in the HTM category is on a historical cost/acquisition cost basis irrespective of the market yields. However, any security held in the available for sale (AFS) or in the held for trading (HFT) categories, the valuation would have to be done on the basis of market value.

Sources said that some of the public sector banks for balance sheet purposes in the last financial year had already shifted some of their high coupon, into the HFT or AFS categories in a bid to boost profits. In fact last year, large volumes of the profits generated from the banking sector was generated by securities valuation, which essentially implied that they need not provide depreciation on any of the high coupon securities.

But such a move had also led to some of them stripping some of the potential high value assets for balance sheet cleaning up purposes. This year, again these banks, with yields moving southwards, have opted for shifting some more of the coupon securities into the AFS and HFT categories in a bid to cash in on the declining yield. As a result, low coupon securities were being moved into the HTM.

But banking sources said that most of these securities being shifted into the AFS and HFT categories were mostly those expected to mature during the next two years. Such securities are, however, high coupons in excess of 11 per cent.

This shift is being done to gain more time to correct their bottom lines through the Asset Reconstruction Corporation.

Most of the shifting was being done in anticipation that more provisions would have to be made during the year for bad loans, the sources added. Bad loans were one of the major reasons for shrinking yields on assets, along with falling interest rates, they added.

The reserve of high coupon securities in the HTM categories would therefore provide some breather to banks, particularly the weaker ones, to restructure their assets and liabilities, they added.

Such bad loans include term loans to State Government undertakings and sick public sector units put on the block for closure.

But some of these assets are to be transferred to the ARC at a discount.

"We are going to incur a loss in transferring the assets to the ARC though any cash flow from such transfers would be shown in the profit and loss account," they added.

This was because such assets had already been fully provided for since they had been classified as loss assets, under which the provisioning prescribed by the prudential guidelines is 100 per cent.

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