“Any hardening of interest rates would depress investment gains under the AFS (Available For Sale) and HFT (Held To Maturity) categories (direct impact),” the RBI said in its Financial Stability Report. AFS, HTM are categories under which banks keep securities.
“With a significant concentration of interest rate positions in the sub five-year tenor across bank groups, and volatility being highest in the shorter tenor buckets, there is a need to be cautious about the prospects of contribution of the trading book to profits, going forward,” it said.
The central bank assigns ‘PV01’ as a measure of sensitivity of the absolute value of the portfolio to a one basis point change in the interest rate.
A parallel upward shift of 2.5 percentage points in the yield curve will lower the system level capital and CRAR by 7.0 per cent and 93 basis points, respectively.
The market value of the investment portfolio subject to fair value for banks stood at Rs 20.9 lakh crore as on end-September 2020, the highest quarterly balance since March 2017. About 95 per cent of the investments subjected to fair valuation were classified as available for sale (AFS), a category where banks can sell securities without holding until maturity.
An analysis of held-to-maturity (HTM) positions as of September 2020 across bank groups reveals that unrealised gains of PSBs are almost evenly spread across SDLs and G-Secs while those of private sector banks are concentrated in G-Secs.
The tenor-wise distribution in government banks indicates a steepening bias, with a slight increase in PV01 of 1-5 year maturity bucket and paring in the greater than 10-year segment, while the PVBs’ view appeared unchanged, said RBI adding that foreign bank were seen to be having significant exposure in the long end of the curve.
The adverse scenarios used in the macro stress tests were stringent conservative assessments under hypothetical adverse economic conditions so the model outcomes do not amount to forecasts, the report said.