Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banks: How well protected? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 19, 2003

    Banks: How well protected?

    A soft interest rate scenario advocated by the RBI coupled with low credit off take has seen interest rates fall to historically low levels. Low credit off take has prompted many banks to invest in G-Secs at levels more than that required for purposes of SLR. While the threat of falling G-Sec prices may be a short term concern for now, the reality is that in the long term there will be an improvement in credit off take and at that time G-Sec prices are likely to further witness a decline.

    In our earlier article Banks: Prudence warranted we had highlighted the fact that small banks that do not have a large net worth are in a situation where a considerable part of their net worth could be eroded due to falling G-Sec prices. In this article we look at the stipulations of the RBI regarding this matter and the position of public sector banks (PSB) and private sector banks regarding the same.

    The RBI has stipulated that in order to protect the banks against drastic movements in interest rates, banks have to create an investment fluctuation reserve (IFR). This IFR must be created by transferring maximum amount of gains that the bank makes from the sale of investments in securities like G-Secs. Banks have to achieve an IFR at a minimum of 5% of all investments in ‘held for trading’ (HFT) and ‘available for sale’ (AFS) categories, within a period of 5 years. For example if a bank has Rs 50 in HFT and Rs 50 in AFS he has to have an IFR of a minimum of Rs 5.

    Banks: IFR status
    (Rs bn) Total
    (Rs m)
    Net worth 1% of investments
    (Rs m)
    Net impact
    (Rs m)*
    Erosion in
    net worth*
    HDFC Bank 120 2401 20 1,200 1,200 -
    ICICI Bank 359 273 66 3,589 (3,316) 5.0%
    IDBI Bank 24 100 3 242 (142) 4.7%
    UTI Bank 66 708 6 663 45 -
    SBI 1451 6712 152 14,514 (7,803) 5.1%
    BOB 238 2568 36 2,383 185 -
    BOI 221 2418 28 2,208 209 -
    Corporation Bank 81 898 20 806 92 -
    Oriental Bank 137 1205 16 1,372 (167) 1.0%
    PNB 282 3101 29 2,821 280 -
    * If there is a 1% fall in the value of investment portfolio
    Investments include government securities and other securities like equity and debentures. It also includes investments in subsidiaries
    All FY02 figures

    The table above shows the position of various banks with respect to the provision they have made for the investment fluctuation reserve and the effect a 1% fall in investments on the net worth of these banks. Among the private sector banks in the study HDFC Bank is clearly the best-protected bank, while among the PSBs Corporation Bank has this distinction. We would like to point out here that while the IFR is for protection of the G-Sec portfolio our study includes all investments of the bank.

    As we do not possess the exact figures of the investments in ‘held for trading’ (HFT) and ‘available for sale’ (AFS) categories of these banks we are not in a position to comment on whether the provisioning carried out by these banks is in line with the RBI guidelines. But we assume that the IFR of these banks is still short of stipulations. The table illustrates the fact that for some banks like ICICI Bank, IDBI Bank and SBI the IFR is not enough to prevent the erosion of the net worth in case of a 1% fall in their investment portfolio. The level of IFR is even more important currently as the RBI has further stipulated that banks are to ‘mark-to-market’ the individual scrips held under the AFS category, at least at quarterly intervals instead of annual intervals.

    Banks have aggressively provided for the IFR in FY02 and this trend is likely to be followed in FY03 also. Erosion in the equity capital of the banks limits the expansion plans of banks, as the capital adequacy ratio of banks is dependent on the net worth. Banks may witness lower earnings growth as they aggressively provide for NPAs and the IFR, but in the long run it is going to protect the banks against adverse changes in interest rates that threaten to adversely impact the equity capital of the bank. Better-managed banks have shown the will to protect the capital of shareholders. IFR may well turnout out to be a tool to judge the quality of the management in the future especially in a scenario of volatile interest rates that the country could witness in the future. Investors may want to keep this aspect in mind when they are looking to invest in banks.



    Equitymaster requests your view! Post a comment on "Banks: How well protected?". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 16, 2017 (Close)