Banks seek ECL relief amid rising bond yields

Banks urge RBI for relief on HTM investment portfolios ahead of the April 2027 ECL framework implementation, citing risks from high bond yields and potential capital erosion. Discussions focus on deferment and alternative accounting methods.

The yield on the benchmark 10-year government bond surged to 7.48% in October, driven by elevated crude oil prices, rising US yields and expectations of further interest rate hikes. It has since eased to 7.15% on Monday, but remains well above the 6.75% recorded at the end of June.

Lenders have sought either a deferment of the framework's implementation for investment portfolios or an alternative accounting treatment that would spare them from recognising mark-to-market losses, people familiar with the discussions told FE. They have also questioned the rationale for the proposed change.

The ECL framework, scheduled to take effect from April 1, 2027, will replace the existing incurred-loss provisioning model with a forward-looking approach to recognising potential credit losses.

Under the proposed framework, banks will have to adopt the effective interest rate method and value their HTM portfolios at fair value as of March 31, 2027. The difference between the existing carrying value and fair value will be adjusted through reserves, potentially affecting banks' capital positions. However, the fair-value adjustment will be a one-time exercise, with no requirement for subsequent mark-to-market valuation of HTM portfolios.

"The ECL framework requires us to mark our HTM portfolios to fair value, which could result in significant provisioning or additional capital requirements," said the treasury head of a private sector bank.

Although banks had flagged these concerns earlier, the sharp rise in bond yields in recent months has heightened their urgency. Higher yields translate into lower bond prices, potentially magnifying valuation losses when banks migrate to the new framework.

"The rise in bond yields could significantly dent banks' capital when HTM portfolios are fair-valued during the transition. Banks have therefore sought a postponement of the April 1, 2027 deadline for investment portfolios," a source said.

Banks believe a deferment of about a year would give them more time to prepare for the transition and potentially soften the valuation impact. Discussions with the regulator are also being pursued through the Indian Banks' Association (IBA) and the Fixed Income Money Market and Derivatives Association of India (FIMMDA), sources said.

Another treasury head at a large private sector bank questioned the need to change the accounting treatment of HTM securities.

"The requirement to mark HTM portfolios to market value is a departure from the earlier framework. We have sought clarification from the RBI," the executive said.

Banks have suggested allowing securities to be carried at their acquisition cost under the 2024 investment guidelines, rather than requiring a fresh fair-value adjustment at the time of transition.

"If banks are allowed to use the acquisition cost of securities under the 2024 guidelines, they may not need to mark these investments to market. This could address a significant part of the concern," the executive said.

Another treasury official said banks should be permitted to retain the existing treatment of HTM portfolios while shifting to the effective interest rate method, without having to recognise additional valuation losses.

The potential impact is already becoming evident in banks' estimates. During the second-quarter earnings season, lenders flagged higher anticipated valuation losses on HTM portfolios following the surge in yields.

Canara Bank has raised its estimated one-time provisioning requirement to ₹12,000-15,000 crore from ₹10,000-12,000 crore earlier. Indian Bank, meanwhile, is preparing for a potential valuation hit exceeding its earlier estimate of ₹3,500 crore.