According to an RBI report released on Thursday, the banking industry is “well prepared” for the present period of hardening yields.
According to the article published in the RBI Bulletin for October, the lenders have benefited from the timely development of the “investment fluctuation reserve” since it offers sufficient buffers to resist trading losses.
The authors of the paper, Radheshyam Verma and Rakesh Kumar, emphasized that the hardening of the G-sec (government securities) yield is a market risk that banks face in a context of increasing inflation and the process of monetary policy normalization. However, the document does not reflect the institutional views of the RBI.
It said that the change in monetary policy attitude may have an outsized effect on bank profitability, but noted that larger banks are better able to weather shifting policy environments due to their size.
The document noted that overall, the banking industry “appears to be well prepared in the current phase of hardening of yields as the timely creation of investment fluctuation reserve (IFR) provides adequate buffers to withstand trading losses.”
According to the paper’s empirical study, trading revenue (negative) and net interest margin (positive) are affected differently by short-term yield and slope.
It added that the net interest margin was shown to be a little more sensitive to the short-term rate in the case of bigger banks, while the influence of short-term yield on trading revenue was found to be less for larger banks.
The MTM (mark-to-market) losses have been a key cause of worry for both banks and regulators due to the systemic influence of interest rates on financial markets, it added.
“Going forward, strengthening of risk management practices and internal controls by banks remains of paramount importance,” the report said.