Rising government bond yields are threatening to increase the cost of banks’ transition to new accounting norms from April 2027.
While most banks have a fair idea of the provisions they will need under the expected credit loss (ECL) framework, the potential hit from revised valuation norms for held-to-maturity (HTM) securities remains a moving target. Much will depend on where bond yields stand when the new rules kick in on April 1, 2027.
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Canara Bank has already raised its estimate of the combined one-time provisioning requirement to Rs 12,000-15,000 crore from Rs 10,000-12,000 crore earlier, factoring in potential mark-to-market (MTM) losses on its HTM portfolio as yields harden.
“We have not calculated exactly, but what we roughly presume, it will be somewhere Rs 12,000-15,000 crore,” managing director and chief executive Brajesh Kumar Singh said during the bank’s second-quarter earnings call.
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Singh told FE that the final bill would depend on bond yields prevailing on April 1, 2027. “Since these yields have hardened, under mark to market there will be little more provision that is required,” he said.
The bank, however, is confident of absorbing the additional Rs 2,000-3,000 crore burden without a significant dent in its capital position or profitability.
“We have already raised our provision coverage ratio by 175 bps to 95.34%. Our Common Equity Tier 1 capital also is 12.80% against regulatory requirement of 8.5% only,” Singh said.
Indian Bank, too, is bracing for a possible valuation hit over and above its estimated ECL requirement of Rs 3,500 crore.
“Our ECL impact is Rs 3,500 crore, but there will also be an impact from HTM valuation, which will depend on yields. Yields have suddenly hardened, but I think they will come down a little,” managing director and chief executive Binod Kumar said.
The bank has already set aside Rs 2,500 crore towards its estimated ECL requirement, leaving it better placed to absorb the transition impact.
The concern stems from two major regulatory changes taking effect simultaneously. The ECL framework will require banks to recognise potential credit losses based on forward-looking assessments rather than waiting for signs of actual stress. Separately, revised investment valuation norms could expose banks to losses on their HTM portfolios, depending on prevailing market yields.
The timing is particularly challenging. Bond prices move inversely to yields, meaning a sustained rise in yields could translate into higher valuation losses and push up the one-time transition cost. A decline in yields before the implementation date, on the other hand, could soften the blow.
Interestingly, while the bond market is emerging as a fresh source of uncertainty, the ECL provisioning picture at several banks has become more manageable.
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Punjab National Bank has pared its estimated ECL requirement to around Rs 8,000 crore from Rs 9,000-9,500 crore earlier, following improvements in its calculation systems. The lender made an additional provision of Rs 1,100 crore during the September quarter to prepare for the transition.
Union Bank of India has kept its estimate of additional ECL provisions unchanged at Rs 5,500 crore. Federal Bank, meanwhile, continues to expect a one-time transition impact equivalent to 1.5-2% of its net worth.
For banks, the challenge is therefore shifting from estimating credit losses to managing the combined impact of provisioning and investment valuation. With just over five months to go before the new norms take effect, the direction of government bond yields could prove crucial in determining how expensive the transition ultimately becomes.
This article was first uploaded on October twenty, twenty twenty-six, at twenty-six minutes past seven in the evening.
© The Indian Express (P) Ltd
