Reserve Bank of India

THE Reserve Bank of India (RBI) has extended a special dispensation to State Bank of India (SBI) , helping the country’s largest bank prop up its bottom line for 2007-08. The central bank has allowed for a liberal valuation of a portion of the bank’s bond portfolio, enabling the bank to set aside lesser funds for depreciation provisions.

The special dispensation pertains to the set of government bonds SBI subscribed to, for funding the government’s investment in the bank’s rights issue. Since these bonds are different from securities that form part of the centre’s annual borrowing programme, they do not qualify for meeting statutory liquidity requirements (SLR) guidelines that mandate bank investments in government bonds. The normal practice for valuing bonds that do not qualify for SLR is to use a benchmark yield 50 basis points higher than the yield on government bonds of the same tenure.

However, SBI has been allowed to do a mark-to-market of these bonds in such a way that they yield a return of only 25 basis points over the yield on regular g o v e r n m e n t bonds of the same maturity. To show a higher yield, the bank has to write down the market value of the bond. The special dispensation to use a lower yield benchmark has saved the bank Rs 168 crore in mark-to-market losses in the fourth quarter ending March 2008.

At a mark-up of 50 basis points, SBI would have suffered a loss of Rs 336 crore. However, since RBI has given them a special dispensation of 25 basis points the losses have been reduced to Rs 168 crore. SBI officials justify the special dispensation saying that had they not been forced to invest in these bonds to fund the government investment, the bank would not have to provide for even the Rs 168 crore. Officials said the bank had, in fact, asked RBI to treat these bonds on a par with SLR bonds.

SBI had subscribed to Rs 9,996 crore of 8.35% 2024 bond to fund the government investment in the bank’s rights issue. However, days after the ,issue bond prices crashed following fears of monetary tightening to tame inflation. In end-March, 2008 bonds maturing in 2023 were trading at a yield of 8.37%. SBI has valued its bonds at a yield of 8.62% — 25 basis points over 8.37%. Currently, there is no government paper maturing in 2024 and therefore, the 2023 bonds were used as a valuation benchmark.


SBI’s net profit for the fourth quarter jumped 26% to Rs 1,883 crore, above the market expectation of Rs 1,600-1,700 crore. The fourth quarter provisions, which include the Rs 168 crore mark-to-market losses on Rs 9,996 crore bonds, rose 14% to Rs 1,620 crore from Rs 1,413 crore. Money market dealers say that the special dispensation is unusual because this leads to some discrepancies in the way non-SLR government bonds are valued. Even the oil bonds issued by the government do not enjoy an SLR status and are at a mark-up of 50 basis points over government securities of the same tenor.