Following a lull of 5 years, state-owned government banks in FY2021 have reported a profit on the back of windfall gains made on their bond portfolios, ICRA( formerly-Investment Information and Credit Rating Agency) said in a press note on Monday. The gains were in account of the sharp rise in the bank's bond portfolios following the sharp cuts in policy rates by the Reserve Bank of India.

The report also said that with a year-on-year (YoY) deposit growth of 11.4 percent and muted credit growth of 5.5 percent in FY2021, the liquidity in the banking system remained abundant at Rs 5-7 lakh crore in FY2021. Given the rate cuts announced and the abundant liquidity due to mismatch in the deposit and credit growth, the daily average for the benchmark 10-year government securities declined from 6.42 percent in Q4 FY2020 to 6 percent in Q1 FY2021, 5.93 percent in Q2 FY2021 and 5.90 percent in Q3 FY2021. It rose slightly to 6.06 percent in Q4 FY2021.

Falling interest rates make bond prices rise and bond yields fall. Conversely, rising interest rates cause bond prices to fall, and bond yields to rise.The repo rate and the reverse repo rate were cumulatively cut by 115 bps and 155 bps, respectively, during March 2020 and May 2020 to 4.00% and 3.35%, respectively. State-owned lenders booked a profit of Rs 31,600 crore from treasury gains compared to overall profit before tax of Rs 45,900 crore in FY2021, said ICRA in its statement.

To give a comparison, the gains in the bonds were higher than the government’s capital infusion of Rs 200 billion in FY2021.

On an aggregate basis, FY2021 saw 12 public sector banks reporting a profit after five consecutive years of losses. ICRA cites that bond gains alone were not responsible for the profit, but return to profitability was also supported by lower credit provisions on their legacy non-performing assets after the high provisions made during the last few years.

Treasury gains leading to profit were not limited to public banks, but their private peers also witnessed a rise in their trading profit to Rs 18,400 crore in FY21 which is 21% of their profit before tax for the year, from Rs 14,700 crore in the prior fiscal.

Going forward, according to ICRA,treasury gains would likely be much lower in the current financial year, given the limited headroom for a further decline in bond yields.

Bond investments may undergo changes based on the dynamics of the market. Investors should consult experts of their choice before investing in bonds. Bondskart too has a panel of experts to guide you through your bond investments. You could buy/sell bonds on our platform. Please contact us if you would like to know more.