The collateral damage from the currency war RBI is waging has crashed on the public sector banks. The balance sheet of all these banks could see a mark to market loss of about Rs 60,000 crore this quarter.
Each of these banks hold government bonds as part of their statutory liquidity ratio (SLR) portfolio. But unlike their private sector counterparts, they hold up to 30 per cent of their investments in these papers instead of the regulation 23.
Given a Rs 70 lakh crore of aggregate portfolio of the banks, the percentage of the SLR component, which is not in the held-to-maturity basket of these public sector banks, is then about Rs 5,60,000 crore since they are holding it because they want to, as a safe investment opportunity.
But when the yields on these instruments rise even by 10 basis points, there is a loss close to Rs 60,000 crore. The yields soared as the RBI pushed to keep the rupee from depreciating — flooding the market with government papers making them cheaper.
On manic Friday, the RBI had to set the yields on the most popular government paper the 10-year ones, at 8.74 per cent, which is 53 basis points more than the previous auction — yet 8 per cent of the papers went unsold. The choice for the public sector banks and their owner, the government, is now to make provision for these losses and book it to the public, the taxpayers.
In any case, the smaller public sector banks have already suffered heavy damage from the events of the past few years. Their loan books have shrunk. Their restructured assets and gross non-performing ones are close to 10 per cent of their portfolio. Since they make hardly any income from fees, their stock of government bonds was the best bet to keep them going. With these too gone, the government and RBI will come out of this war with a liability far above the carrying capacity of the economy.
Before the crisis struck, Crisil research had estimated that public sector banks will need to raise Rs 2,43,000 crore as Tier I capital. Unless the RBI works out a plan to defer the Basel III time table and isolate the Indian banking sector even more from the international financial sector, the finance ministry was to provide Rs 24,300 crore of this bill each year.
Even if it wants to, it cannot