The sharp drop will boost the bottomline of a large number of public-sector banks, while new private and foreign banks, which are active in trading securities, will be hit hard.

According to analysts, the entire banking industry will be able to write back excess provisioning in the their SLR portfolio of about Rs 5,000 crore. State Bank of India, Bank of Baroda, Bank of India, Oriental Bank of Commerce and Punjab National Bank will be the major beneficiaries. Besides, banks like Bank of Maharashtra, Punjab & Sind Bank and Union Bank of India, which are not very active in trading securities, will also reap a rich harvest.

State Bank and Bank of Baroda are planning to mark to market 100 per cent of theirsecurities portfolio using the depreciation benefit. According to RBI guidelines, valuation of gilts in the "current" category should be done as per market quotations on March 31, 1998, wherever available. The central bank fixes the YTM where market quotations are not available.

Public-sector banks are required to mark to market 60 per cent of their investments in government securities in 1997-98, while new private and foreign banks treat the entire portfolio as "current". "On March 31, nine-year paper was quoted at 12.03 per cent and 11-year paper at 12.15 per cent. Ideally, the YTM for 10-year paper should be anywhere between 12.03 and 12.08," sources said. In 1996-97, the reduction in YTM on 10-year paper was 44 basis points (from 14 per cent in 1995-96 to 13.56 per cent) and 2.74 percentage points for one-year paper (from 13.12 per cent to 10.38 per cent). For the first time, RBI also fixed the YTM on government securities maturing in less than one year (7.31 per cent) last year.

Banks are allowed touse the excess provision towards depreciation in investments done in 1996-97 to boost their Tier II capital. Any excess provision for depreciation in investments held by banks as at the end of 1996-97 over the requirement of the same for 1997-98 should be taken to the profit and loss account under the head "expenditure -- provisions and contingencies" as a credit item. Thereafter an equivalent amount should be appropriated to "capital reserve" account and shown under "reserve and surplus" in the balance sheet.

New private banks and foreign banks will be hit hard following the turmoil in the gilts market in the wake of the tight-money measures announced by the RBI on January 16.

The central bank at one stroke jacked up the bank rate, repo rate and banks' cash reserve ratio (CRR) in mid-January to push up interest rates and to keep speculators at bay from the foreign exchange market.

Consequently, banks made a beeline to offload their securities portfolio to generate liquidity. "Those banks which wereactive in trading will be hit hard. For instance, RBI sold a five-year paper at 11.15 per cent in the primary market in the third quarter of 1997-98. In the secondary market, the security was sold at 11.45 per cent in the last quarter," a senior banker said.

Public-sector banks gained about Rs 2,000 crore in 1996-97 following the slash in YTM from 14 per cent to 13.56 per cent. The Reserve Bank, which had, at one point of time, directed the banks not to "inflate" net profits by using writeback of excess provision towards depreciation in investments, later changed its stance and allowed them to prop up their profits.