The RBI has also directed banks to mark-to-market 70 per cent of their portfolio of approved securities in March 1999, up from 60 per cent in March 1998. A clutch of public-sector banks led by State Bank of India (SBI), Bank of Baroda, Oriental Bank of Commerce and Corporation Bank has decided to mark-to-market the securities portfolio using the depreciation benefits on account of lower YTM.

"Even after pushing the portfolio to the current category, there will be a substantial surplus," a senior banker said. For instance, State Bank is likely to have a surplus ofRs 600 crore and Bank of Baroda Rs 200 crore. SBI chief financial officer Parag Bhattacharya refused to quantify the surplus. "There will be a substantial surplus. We will mark-to-market anywhere between 75 per cent and 100 per cent of the portfolio," Bhattacharya said.

The sharp cut in YTMs for securities of all maturities has come as a windfall for public-sector banks as the industry will gain over Rs 5,000 crore from depreciation benefits. According to RBI guidelines, banks are required to take the excess provision for depreciation in investments in 1996-97 over the requirement of the same in 1997-98 to the profit and loss account as a credit item and appropriate an equivalent amount to the capital-reserve account.

However, "if there is any appreciation in the value of securities on account of the method of valuation... it should not be booked as an income," an RBI directive sent to all commercial banks--excluding regional-rural banks -- said. The depreciation amount, to be shown as reserves andsurplus in the balance sheet, is eligible for inclusion in the Tier II capital. This, in effect, means banks can write back the excess depreciation and use it to boost its net profit and the capital-adequacy ratio. Detailing the valuation method for permanent investments, the central bank said they should be valued at cost and in case the cost price is higher than the face value, the premium should be amoratised over the remaining period of the security's maturity. On the other hand, where the cost price is less than the face value, the difference should be ignored and should not be amoratised or taken to the income account since the amount represents unrealised gains.

The RBI has pegged the YTM for taxable public-sector bonds at 100 bp above gilts. For tax-free public-sector unit (PSU) bonds, the rate has been fixed at 10 per cent. The valuation of 6 per cent Capital Indexed Bonds should be done at cost, the RBI directive said.

The RBI has directed banks to value shares, debentures and mutual- fundunits on their portfolio on the basis of stock-exchange quotations wherever available. If current quotations are unavailable, banks are allowed to take into account the shares' book value. Revaluation reserves, however, cannot be considered to arrive at the book value.